Hello , I want to believe that you had a great weekend and are ready to take charge of your Business this week?

For the sake of those who are new around, we will talk a bit more on the topic of share vesting and what it means to actually subject shares to a vesting schedule.

The idea is to help you get Many feet ahead in protecting your interest in your business.

Shall we begin...

First, What is a Share?

A share is a unit of ownership in a Company's Share capital.

Every registered company has an authorised share capital.

The Company's authorised share capital is the total number of shares that a company has per time.

So having shares in a company (shareholder) means that you own some number of units of shares out of the Company's share capital.

For example, if you are a Co-founder in a one million share capital Startup company and you have 40% equity, it means that you actually have 400,000 units of 1,000,000 Share capital.

I hope this is clear enough?

Now let's get to what it means to vest the shares.

To vest the shares is to make the Co-founders/Shareholders or employees "Earn the full ownership of their shares in the Company over a period of time.

What this means is that when you issue shares to your Co-founders they don't get automatic access to the shares almost immediately.

The ideal vesting period is four (4) years with a one-year Cliff. (This is called the vesting schedule).

You can decide to vest for more than 4 years or less than that, but the ideal vesting period is 4 years.

The idea behind vesting shares is to:

1. Ensure that your Co-founders or Employees are with you for the long run.

You don't want to issue 50% equity to your Co-founder only for him to abscond with the shares after 6 months of starting out.

2. Protect the interest of the Company.

Should a person decide to leave before the end of the vesting period, he only gets the part of the shares that have been vested, and the rest goes back to the Company.

Do you follow?

Now, this is becoming rather long, but let me just quickly explain to you how Share vesting typically works in a Company.

Using a 4-year vesting schedule.

Instead of getting 100% of their equity at once, the Co-founders will get 25% of their equity per year until the 4th year. (25×4=)

For example:

1st Year - 25%

2nd Year - 50%

3rd Year - 75%

4th Year - 100%.

To earn the 25% of the shares you must stay with the Company for one full year.

If you leave at the 11th month ( 0-11th month is cliff period) you don't get anything from the Company.

If you stay for full 2 years with the Company you get 50% of the equity and so on and so forth.

Now to avoid an almost fatal mistake in your Startup, Your Shareholders or Co-founders Agreement should always contain a clearly defined Share vesting provision.

Alternatively, you can have a stand-alone Vesting Agreement outside of your shareholders' Agreement.

So, there you have it .

If you would need us to help the legal aspect of your Business in any way, reply to this email and let us get started.

To your #LegalSense

P.S. Share vesting is only applicable to you if your business is registered as a Company limited by shares (LLC) and not a business name or an Enterprise.

#BarinaadaLegal.