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Offering as well as holding equity in a company can be risky business. To ensure transparency and accountability between the share issuer and the shareholder, a share vesting agreement can be greatly beneficial. To find out more about drafting this legal document, we have put together a guide.
What is a share vesting agreement?
A share vesting agreement lets a company apply vesting conditions on issue shares which are being sold to a stakeholder. The aim of this legal document is to protect the interests of the business and all the employees who continue to contribute to it.
A share vesting agreement is used when shares have already been issued in full and a company wishes to add terms and conditions to those shares. Not meeting these set conditions can allow a company to regain control of the shares.
When should I use a share vesting agreement?
A share vesting agreement is used when a company is issuing shares to a stakeholder and vesting conditions must be applied. Share vesting agreements are a must-have document for start-ups, as it includes provisions for exit and allows companies to reserve the rights to buy back shares at a nominal price.
What is share vesting?
Share vesting is when an employee, co-founder or investor is rewarded with shares and receives the full rights to them over a set timeline or when a specific target is met. Offering vesting means your business won't have to pay out as much in cash compensation and instead offer shares of stock, avoiding a drain in cash flow. Vesting also encourages employee loyalty, as most people won't want to walk away from the potential of being compensated with vested shares.
Regular share vesting agreement vs reverse share vesting agreement
Regular vesting is done to keep employees in the company. Through a regular vesting agreement, employees have the right to buy company shares once their shares are fully vested. With a reverse vesting agreement, it removes the shareholder's involvement in the company profits. When drafting a reverse vesting agreement, the company can repurchase any allocated shares in case of a premature exit, redundancy or firing.
What does a share vesting agreement include and not include?
Although it all depends on the nature of the business and the terms offering with the shares, there are some clauses that should and should not be included in a share vesting agreement.
- Shareholder details
- Number of shares
- Share types
- Criteria of the vesting share
- Vesting schedule and timeline
- Options for company buy-back
- Confidentiality terms
- Definitions and interpretations
- Terms for exit
- Vague language that could be misinterpreted
- Misleading promises
- Conditions that are impossible to meet
- Last minute changes
How effective is a share vesting agreement?
A share vesting agreement can be a crucial document for new businesses. Their main role is to protect the interests of all parties, helping a company grow. A well drafted share vesting agreement ensures that share ownership is properly restricted and is earned by fair means. The terms set out in an effective share vesting agreement should be stringent enough to keep a business protected from lack of commitment or general incompetency.
Do I need a lawyer for a share vesting agreement?
Because share vesting agreements have tax implications, it can be a good idea to have a lawyer to help you draft this document. If you don't wish to seek legal advice, there are many websites that officer guidance and share vesting agreement templates.
Get access to share vesting agreement templates online
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How do I write a share vesting agreement?
All the terms disclosed within a share vesting agreement should be negotiated upfront. This means there is no room for confusion, ensuring both parties understand their responsibilities. Terms listed within the share vesting agreement should be agreed upon at the beginning, making the whole process automated.
Where to get free legal documents and templates like a share vesting agreement?
There are plenty of online resources available that provide legal templates like share vesting templates. Simply download the template, customise it to fit your requirements and then download it to your device. Here are some websites that offer share vesting agreements:
- Lawpath. Lawpath is an online legal resource especially aimed at small businesses. Users can browse free samples on its website but must sign-up to access the range of customisation options made available.
- LawDepot. LawDepot offers a wide range of free legal templates. They can easily be completed to suit your needs and then downloaded to your desktop.
- Wonder.Legal. Browse a large range of legal document templates with Wonder.Legal. Some of them are free of charge, others may cost a small fee to purchase.
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