Reverse Vesting
Reverse vesting occurs when a company’s co-founder receives his or her shares and ownership interest upfront. This exchange is subject to vesting similar to employee stock options. When founders launch a start-up, they immediately get equity. Reverse vesting ensures that if a founder leaves the company before the specified period is over (usually four years), the company can purchase its share of equity for little to no cost.
Why Reverse vesting is important for start-ups?
How reverse vesting works?
- A founder must agree to reverse vesting. When they do, either some or all of their shares are subject to reverse vesting.
- The standard ratio is 75 percent, meaning a founder keeps 25 percent ownership. The other 75 percent reverse vests over time with one exception. If a founder has run the company for an extended period, he or she may reverse vest more quickly.
- The founder of a start-up will generally reverse vest his or her ownership interest over a period of two to three years. When the owner reaches a milestone, such as six months or a year, he or she gains possession of a portion of the stock.
- For an owner with 75 percent reverse vested over a three-year span, he or she will work on a schedule where the owner earns back 25 percent of the ownership stake each year. Some agreements are monthly or quarterly instead. In those situations, the founder would regain a little more than 2 percent of his or her stock for each month the founder stays at the company.
Documents required for Reverse Vesting
- Balance sheet and Profit & Loss Account
- Board’s Report
How can Start-up Movers assist you in Reverse Vesting implementation?
How can Start-up Movers assist you in Reverse Vesting implementation?
- Drafting of Reverse Vesting Agreement
- Assistance on valuation.
- Any other service required to facilitate smooth execution of aforesaid.
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Frequently asked questions
An agreement must provide a fair balance between founders and investors. The good-leaver clause is the method to do so. The term is what it states: A founder leaves in a good way. As long as that’s true, the founder won’t lose unvested shares.
Should a founder quit, he or she gives up unvested shares. Should the person get fired, he or she keeps the unvested shares, except in one instance. A founder fired for cause again loses his or her unvested shares. The goal is for a founder’s exit from the company to not damage the reputation of the business. As long as that happens, he or she can keep the unvested shares.
To a start-up, reverse vesting is a form of protection. The fear exists that a co-founder could leave the company while maintaining a large ownership interest. By using reverse vesting, the company establishes rules to avoid this situation.
Yes. The ones that do have cliffs use set terms. In a one-year cliff, the company can repurchase all shares if the co-founder leaves before the end of the first year. One-year cliffs are more common for employees than for founders.
When founders launch a start-up, they immediately get equity. Reverse vesting ensures that if a founder leaves the company before the specified period is over (usually four years), the company can purchase its share of equity for little to no cost.
Investors are attracted to strong leadership as much as they are to specific products. A reverse vesting agreement increases the likelihood that a founder will stay with the company, which is what investors want.
