Why is vesting important for a company?

There’s one very simple reason why vesting is critical to a company. Vesting is the only mechanism that a company has to claw back equity from someone who’s not performing well or who’s breached an agreement with the company.

One of the key components of vesting is that the company retains the right to buy back shares over time. When a company sets up vesting provisions with a founder, key employee or other service providers, those shares are not issued until that person is “fully vested”. So, if the founder, key employee, or other service provider breaches contract or is fired for cause, the company can easily reclaim their shares.

Without the ability to claw-back share, the company may have to keep a disgruntled employee on the cap table. Worse, it could mean that someone who is not materially contributing to the company owns a disproportionate number of shares. This will both turn off investors and lead to a negative atmosphere for the current team. Vesting also ensures that anyone subject to vesting has an incentive to see an increase in the value of the company.

Learn More About Vesting

Understanding Founder Vesting
Do Founders Need to Pay For Shares?
Tax On Founder Shares Explained
Section 409A and Safe Harbor Rules

 

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