Vesting Agreements
When starting a company with other individuals, how the shares of ownership in the company must be decided. You could also choose to reward employees in a startup company by providing stock or stock options in the company. With both of these scenarios, a vesting agreement can be beneficial. A vesting agreement governs how stock or stock options will be awarded to an employee or owner in a company.
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Vesting Agreement Terms
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With this agreement in place, an employee has to work a certain amount of time before he can get stock or stock options in the company. This keeps the employee or the founder of the business from getting too much stock all at the beginning of the business. For example, an employee might receive a certain percentage of stock in a company after five years of service and then another percentage for every year of service after that.
Motivate Employees
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Vesting agreement can also motivate employees. When you simply give stock options to an employee from the beginning, they could cash out and leave the job at any point. With this strategy, you can spread out the accumulation of the stock options. This way, your employees will have something to aim for as a goal; the employee knows in advance how many years of service it takes to accumulate stock in the company.
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Attract Investors
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A benefits of using a vesting agreement is that it helps you secure investors in the business. If you are planning on securing financing from a venture capitalist or an angel investor, you may be required to use one of these agreements. By doing this, the venture capitalists can ensure that you have a vested interested in making sure the company performs well over the long-term. Otherwise, you could simply sell your stock and cash out shortly after getting the investment money from the investor.
Vesting Schedules
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Vesting agreements can come with many different types of vesting schedules, which is how the shares will be distributed over time. For example, you might get an equal number of shares every year. You could also get nothing for the first few years and then get a lump sum after a certain amount of time. By outlining the schedule at the foundation of the company, it makes the process of stock distribution clear for investors and employees alike.
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