As part of an investment round, company founders generally receive a redistribution when the company is reorganized and the articles of incorporation restated. This is because the company must re-authorize classes of shares and distribute those shares to existing company owners and to the new investors. The shares granted to the company founders are routinely subject to a vesting schedule and vesting provisions. This means that that full ownership of the shares vest in the founder on a schedule or upon the company meeting specific milestones. If the founder has been working for the company for a significant amount of time, the founder will receive some fully-vested shares.
Startups also frequently use stock to compensate employees (including founders who remain employees of the company after an investment round). Notably, investors in the startup generally require a certain number of company shares be set aside to compensate employees in the future. This is known as an “option pool”. The shares the employee receives are often also subject to a vesting schedule. Startups often offer these company stock options.
The purpose of making stock grants to founders and employees subject to vesting is to make certain that the founder/employee remains loyal and dedicated to the company going forward. As a shareholder, the founder/employee has a vested interest in the company performing well. Further, the shares are generally subject to provisions call for the forfeiture of acceleration of the shares. These vesting provisions provide security to investors, co-founders, future employees, and anyone concerned with the founders or employees remaining productive members of the company. The option pool also makes shares available for future employees who may also receive a share grant.
The common characteristics of share vesting is discussed below.
How does Stock Generally Vest
The most common scenario is that stock granted to founders or employees vests in the shareholder over a three to four-year period. The first shares vest after a set period of time (known as a “cliff”), usually one year. The remainder of the shares vest on a pre-determined schedule. In some case, the shares will vest when the company meets certain milestones. These vesting provisions are often included with share grants to founders.
It is common for a shareholder to negotiate scenarios under which the shares vest immediately. This is known as “acceleration”. This scenario protects the shareholder by making certain that she does not lose ownership of the shares in the event she leaves the company or it is sold before the shares vest. Acceleration clauses generally one in two forms. A “single-trigger” acceleration is when the company is sold or goes public. A “double-trigger” acceleration is when the company is sold and, investors fire the employee (without cause) make unreasonable requirements of the employee causing them to leave.
LawTrades Knows Stock Vesting
Granting stock to founders or employees can be a complicated undertaking. Making an error at this point can have long-lasting consequences of the company and the shareholder. The experts are LawTrades can provide guidance through this process.