Stock Vesting Schedule - Explained
What is a Stock Vesting Schedule?
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What is a Stock Vesting Schedule?
Early business ventures typically reorganize into corporations. The purpose of reorganizing is to establish a formal business ownership and management structure, as well as establish classes of ownership interest that can be efficiently transferred. As previously discussed, founders generally reserve some form of founders stock for themselves. Ownership of these shares may not vest all at once; rather, it may be made subject to a vesting schedule. A common vesting schedule is that shares will vest fully over 3-4 years. There is commonly a cliff or time frame before any shares will vest. For example, the first lot of shares may not vest until 6-12 months of services. Afterwards, the shares may vest monthly or quarterly. The start date for determining the vest date can be the date that the shares are issued or it can be an earlier date. Sometimes the founders will identify an earlier date to account for the work already invested in the business.
Next Article: Vesting Schedule & Follow-On Financing
How does a Vesting Schedule Protect the Company?
The vesting schedule protects the corporation in the event the founder decides to exit the corporation. If the shares have not yet vested, then the shares are either forfeited or the corporation is responsible for repurchasing them from the exiting founder. The requirement for the company to repurchase the shares of exiting shareholders is generally contained within the bylaws and the subject of a buy-sell agreement between the shareholders and the corporation. Equity investors will generally require that stock awards to founders or new employees be subject to such a vesting schedule. This prevents the issue of significant shares of the business being held by third parties who are not materially involved in the business. Founders, on the other hand, will seek to have unvested shares to vest upon exit or termination from the business. The middle ground is that the shares vest if the founder is terminated without cause and they are forfeited if the founder leaves or is terminated for cause. Of course, the for cause and without cause classification can cause serious disputes between founders and the business.
- Note: A middle ground between full vesting and no vesting is partial vesting. Acceleration of vesting for without cause termination may be a partial acceleration of say 3-12 months. This amount may constitute a valid severance package for the departing founder, as most startups have a buy-sell agreement in place that requires the corporation to immediately repurchase outstanding shares upon the separation of a shareholder.