We get approached by lots of founders and investors who want to know whether they should get a vesting agreement. The answer is: absolutely. A vesting agreement protects you from the risks of founding or funding a startup. If one of your founders decides to leave early on and takes a portion of the company’s shareholding with them, then the other founders may be in trouble because they don’t have enough shareholding to incentivise a replacement. It is also unfair that the founder who has left still owns a portion of the company – particularly if you funded it, they didn’t, and they left before generating value from your funding.
Vesting agreement concepts
There are certain key concepts regarding vesting agreements:
Anyone who has shareholding in a company should be vested. Vesting means that instead of getting your full shareholding upfront, you get it regularly in portions over a set period.
Vesting can result in lots of people each owning little pieces of the company, which makes future legal work difficult. Cliffs let you try out a partner in the form of a co-shareholder or incentivise a new employee with shareholding without parting with any shareholding upfront. If the vested person leaves during the cliff, then they get no shareholding. The vested person gets everything that they would have accrued during the cliff period when the cliff ends.
Acceleration gives shareholders a portion of their shareholding if someone that they didn’t anticipate joins the company as a majority shareholder and their full shareholding if that person joins and fires them.
Advisers generally get ‘full acceleration on exit’. When you sell the company, they immediately get the equity that they were promised.
In South Africa
Vesting is well-known in the US where it exists legally and the terms are often in your boilerplate documents. Vesting is not known in the UK where you have to write it into your shareholders agreement. We suggest following the UK approach in South Africa because our company law is so similar.
How can help you?
We can help you to:
- Draft a vesting agreement quickly and easily
- Get advice on your company law matters