Issue shares subject to a vesting schedule

Can shares be issued subject to a vesting schedule?

Startup founders are often issued shares at the time of incorporating. This raises a concern that one or more of the founders can exit the business before “earning” their shares and still continue to own the same proportion of the business despite not being actively involved.

To remedy this concern, it is often recommended that startup founders restrict the issuance of shares so that they are subject to “reverse-vesting”. If a founder exits the business before all of the shares are “vested” (earned), those “unvested shares” can be repurchased for the price they were bought at (usually a nominal amount).

Startup founders often prefer a 4 year vesting period with a 1 year “cliff period”. This means that the founder will not have “earned” any part of their shares until the expiry of the first year. At this point, the founder will have earned ¼ of the shares they were issued (i.e. these shares have “vested”). Then, on a monthly basis, the remaining 3 years’ worth of shares will continue to vest.

Reverse vesting is typically accomplished by the founder subscribing for shares using an agreement called a “Restricted Share Subscription Agreement”.

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