What is reverse vesting? 

Reverse Vesting is the process by which the right to continue holding shares is earned in agreed proportions over a period of time, or based on performance or some other milestone, or a combination of the three. The most common reverse vesting schedule is based on time.

Reverse vesting enables a co-founder to have ownership of the shares (i.e. equity) immediately upon joining, but the company retains control over those shares by requiring that co-founder to transfer them back if certain conditions are not met.

For example: Adam, left the business after 2 years. The agreed reverse vesting period was 4 years. So only 50% of his 50 shares has vested. Therefore, he only gets to keep 25 shares, and he needs to return 25 shares to the Company). 

What is the purpose of reverse vesting? 

When founders decide to go for reverse vesting, they want to incentivise themselves to stick with the company. By holding shares, the co-founder is encouraged not to terminate employment with the company until, at least, the vesting period is completed.

If a co-founder leaves the business before the end of their ‘vesting’ period, then they don’t get to keep all of their shares. Depending on the vesting schedules and periods you mutually agree to, a co-founder who leaves may not be entitled to keep any of their shares. Alternatively, if they have completed their vesting period, they may be entitled to keep all of their shares on leaving.

Why is reverse vesting different from standard vesting?

Standard vesting is where the relevant individual only acquires the shares on specific milestones (e.g. completing 1 year of service) – up until the milestone is reached, the individual does not actually own shares in the company. 

Reverse vesting is where all shares are granted up front but can be ‘clawed back’ by the company if milestones are not completed (e.g. the individual leaves the company before the agreed time period is completed). 

Illustration

Adam and Sarah are equal co-founders.

They agree to a 4 year vesting schedule, with the vesting spread equally across the period. They also agree to a 1 year cliff, so that if anyone leaves before the end of one year, they get nothing. The summary of these terms might look a bit like this:

The full agreement will have further details and provisions (e.g. for what happens if Adam or Jenny leaves before they complete the 4 years) but this illustrates the principle.

Create your Co-founder Reverse Vesting Agreement here

This article was written by Legal Sidekick. Legal Sidekick is the legla platform for startups. We offer automated startup contracts and loads of startup legal resources and guides. For queries reverse vesting for co-founders, contact us at hey@legalsidekick.com