If you are looking for investors in your startup, many will require your company’s founders to sign a reverse vesting agreement for your own shares in order to keep key employees in place. This agreement is just one of the many contracts that will need to be carefully drawn up and executed by a startup lawyer during venture capital funding rounds. Priori can help you and your co-founders find a vetted startup lawyer whom you trust.
Defining Reverse Vesting
Most employees and investors have to earn shares by spending time with the company though a vesting provision or by purchasing the equity. Founders, on the other hand, have equity in a company from day one. Most founder agreements and VC term sheets temper this absolute control of shares, however, through reverse vesting provisions.
Under reverse vesting agreements, founders essentially don’t have full control of the shares they own if they leave the company before the reverse vesting period ends—typically four years. Reverse vesting agreements give the company repurchase rights to those shares not yet mature for a nominal fee or in many cases, for no cost at all. By this agreement, other shareholders have the absolute ability to buy back any shares not yet vested from the founder if they leave.
Why Reverse Vesting Provisions Exist
The purpose of such reverse vesting agreements is to ensure that founders cannot suddenly leave a company in the lurch and take a large portion of shares with them. This agreement protects shareholders and co-founders from a founder walking away with half the shares of the company at an early stage, making it impossible for investors to recover their investment and difficult for the company to further leverage equity for later stages of investment. In addition, reverse vesting incentivizes key employees to stay at the company for long enough for it to get fully established.
Of course, reverse vesting agreements must balance the needs of the founders and investors fairly, which is why most reverse vesting agreements contain so-called “good-leaver” clauses. Under good-leaver clauses, a founder only loses non-vested shares if the founder leaves on his own or is fired with cause. If the company dismisses a founder for any other reason, the reverse vesting provisions do not apply and the founder leaves with all shares intact, regardless of the time spent at the company. This protects founders from being fired at will, allowing shareholders to unjustly reclaim the shares.
A Priori lawyer who can help you decide what type of vesting arrangement makes the most sense for your company and draft the proper documentation and agreements starts around $185 per hour and ranges up to around $450 per hour. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
What is the difference between reverse vesting and regular vesting?
Vesting gives an employee control over shares only after a specific time period has passed. In reverse vesting, the founder already has ownership of all shares; they simply can be forced to sell a certain percentage of them for nothing if the full vesting period has not been completed.
Do reverse vesting provisions usually have cliffs?
It depends on the agreement. Sometimes founders will put a one-year cliff into the agreement, causing all the shares to be subject to repurchase if the founder leaves before the end of the first year. This is by no means standard, however, so you should discuss the implications of this choice with a startup attorney if you are considering incorporating a cliff in your reverse vesting agreement.