A vesting schedule dictates when a founder (or employee) has full ownership rights in the company. This schedule is typically based on duration with the company.
For example, if we use a four year vesting schedule with a one year vesting cliff; if a founder leaves within the first year they receive no shares. After the first year, the shares will vest on a monthly basis until completely vested (intervals of 1/48 or 2.083/per month). In this example, if the owner leaves after month 13 he or she would receive 27.084% of their allotted shares.
Can I just add a vesting schedule to my Stock Purchase Agreement or Operating Agreement?
There are tax considerations that, if mismanaged, can have a significant negative effect on the owner’s income tax return. Thus, it is essential to have proper counsel when opting for a vesting schedule.
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How can I use vesting as an employee (or independent contractor) incentive?
Employees who have restricted stock as part of their compensation will have a stake in the success of the company. This stock should be based on a vesting cliff; to ensure the employee cannot just leave after the first week with full ownership rights.
Creating a vesting cliff is a double edge sword. Just before the cliff date, the employer can terminate the employee (assuming the employment agreement is at-will) to avoid conveying restricted stock. Similarly, after the stock has vested, the employee can leave the company and continue to reap the benefits of his or her shares.
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