By: Doug Bend
Vesting of shares means that the shareholder has to earn their shares over time by staying with the company in some capacity.
If a shareholder leaves the company and owns unvested shares, then the corporation has the option to repurchase the unvested shares typically at the original purchase price.
For example, founders of start-ups typically vest their shares over four years with a one year “cliff.”
If a founder leaves the company before they hit the first year anniversary of their stock purchase agreement, the company has the option to repurchase 100% of their shares.
On the first anniversary of the stock purchase agreement, the founder hits the “cliff” and vests 25% of their shares.
Each month thereafter the founder vests 1/48 of their shares until they are fully vested on the fourth anniversary of their stock purchase agreement.
Issuing shares on a vesting schedule is optional, but it is often a good idea so you have a game plan in place if the shareholder leaves the company in the first few years of purchasing their stock.
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