Definition of Reverse Vesting
Reverse vesting is what happens when a company’s co-founder is awarded shares and ownership interests up front. These shares are usually similar to employee stock options in that they’re subject to vesting and the company has the option of repurchasing some of those shares if the co-founder leaves.
Regular employees usually have to stay with the company for a predetermined period before they have the option to purchase equity. Reverse vesting works the other way round, in that the co-founder is able to purchase shares from the very beginning but they still need to wait out a specified period before they’re able to leave the company with their shares intact.
The duration that co-founders are required to stay depends upon the company in question, but the most common requirement is a period of four years.
Vesting itself is a system by which early employees at a startup are eligible to purchase small amounts of shares at different times over a prolonged period, rather than all at once. This is designed to encourage people to continue working for the company, because the longer they stay at the startup, the more shares they’ll be able to buy.
Vesting and reverse vesting usually works by the company holding the stock in an escrow until it’s vested. In other words, the stock is held back for the employee in question, but they’re unable to actually access it until they’re eligible.
Some entrepreneurs swear by reverse vesting, while others go out of their way to avoid it. It’s possible for a company’s founders to shoot themselves in the foot by implementing reverse vesting and then later deciding to leave. They can end up losing control of the company that they created.
However, the decision is often taken out of their hands by investors, with many VCs and funds requiring reverse vesting to be in place before they’ll consider investing in the company. This makes sense because it provides them with a greater guarantee that the core team will remain in place and therefore that their investment has a greater chance of success.
When are reverse vesting agreements signed?
This depends entirely upon the company in question, but they’re often signed during the initial rounds of investment in a startup. Some forward-thinking founders, or those who’ve created businesses in the past, often anticipate the need for a reverse vesting agreement and work them into their initial contracts and agreements.
Are reverse vesting agreements legal?
The answer to this question depends upon who you ask and it’s considered by many to be controversial. That’s because in some regions, there are laws in place that are designed to stop employers from putting processes in place to force employees to continue to work for them.
What’s a restricted stock purchase agreement?
A restricted stock purchase agreement is the name of the agreement between investors and founders and co-founders which outlines the way that the reverse vesting will work and the way that the company can buy back stock.