A Share Vesting Agreement is a contract granting an individual or company the right to purchase shares. The Share Vesting Agreement allows employees or other consultants to earn equity in a company over time. The employee effectively purchases shares in the company as part of their compensation, but there are restrictions on all or some of the shares that delays the employee gaining full ownership of the shares to encourage the employee to remain with the company.
The Share Vesting Agreement governs how and when the shares are fully released to the employee, the relationship between the employee as purchaser and the company, and what happens to the shares if the employee leaves the company.
Giving employees equity in the company is a popular way to reward them for their performance. However, you also want to incentivise them to remain with the business. Vesting is a great way to encourage long service to the company as you can specify when each of the shares is released to the employee.
For example, an employee may be granted 200 shares in the company, but only 50 are released immediately and a further 50 are released annually over the next three years. It is important to have all terms of the share vesting set out clearly in an agreement before any shares are granted to the employee.
A Share Vesting Agreement protects the rights of the employee as well as giving powers to the company to control who has voting rights and ownership of shares in the future.
When drafting a Share Vesting Agreement, it is important to focus on a number of key clauses, in particular: