When setting up for a new venture it becomes necessary to take some safeguard measures, be them between Founders or between these and workers. In previous posts we reviewed some of these contractual arrangements, such as the Non-Disclosure or Non-Compete Agreements. These contracts are intended to protect a Company’s intangible asset: Information. These assets may take the form of inventions or creations developed within the Company, such as sensitive data, know how, etc. But, how do we grant protection to that one resource that in many occasions seems to be the most valuable and also irreplaceable, mostly when it comes to the first steps of a Company?

We are, of course, talking about people.

It is not unusual that after a Company’s incorporation, in its development stages, whether it is because of unexpected success, is suffering unforeseen hardships or any other reason, that some partners take the decision to withdraw from the venture, taking away with them not only their shares, but also their knowledge and expertise.

In order to avoid this, the Vesting Clause arises, which becomes useful to promote that founders effectively remain in the Company for at least a timelapse agreed upon the Company’s constitution.

The vesting Clause is included into the Company’s constitution and it serves as a mechanism to establish quotas of equity ownership that are deferred in time. After slicing the pie, a Vesting schedule is proposed and established.

Thus, at the Company’s constitution a partial amount from the total of the subscribed shares will be allocated to each partner (as owners of them) and it will also be established the quantity and frequency of shares that each partner is entitled to as long as he/she remains within the Company.

This greatly encourages partners to stay, which is due to the fact that if a partner decides to leave the company, he/she will have the right to withdraw only the portion of shares that, according to the Vesting schedule, at the time owns, and therefore forfeit to the remainder of the subscribed shares.

As a practical example we could establish the following hypothesis:

A Company is created with 2 founders (“A “and “B”) and 100 shares are issued. Partner A subscribes 60 shares (60%) and partner B, 40 shares (40%). A and B agree in the Vesting clause that in the very act of the Company’s constitution each will own 20 and 10 shares respectively. Then, they will agree on the Vesting schedule. For instance, for each month that A  remains in the Company he or she will become the owner of 5 shares and B of 3. This means that within 9 months time A will be the owner of the entirety of his/her subscribed shares , whereas B in 10 months.

This is how the Vesting clause serves as a mechanism to promote that partners will remain within the company, and also as an incentive for work and collaboration.

 

Francisco Mulatti, Lawyer.

Photo: Federico Beccari (CC0)