Vesting

In practice

Vesting protects the team against someone leaving early and still keeping a large stake. Without vesting, that person remains a shareholder without contributing any further. Investors in funding rounds strongly dislike this ‘dead equity’. That is why there is often a ‘cliff’ for the first year. Anyone who leaves during this time loses all the shares or options covered by the vesting. After one year, the entire portion for that year vests at once. After that, further shares usually vest monthly. Reverse vesting is chosen for tax reasons and to avoid red tape. The shares are transferred in full from the outset, with a duty to transfer the unvested shares back on leaving.

The terms on which vested and unvested shares are transferred back often depend on whether the person is a ‘good leaver’ or a ‘bad leaver’. The question is whether the departure was triggered by misconduct, happened for no particular reason or was necessary, for example, on health grounds. Under German law, such clauses can be permissible in start-ups. The compensation for the departing shareholder is reviewed separately. For tax purposes, shares transferred in connection with work for the company can count as wages.