What is a Stock Vesting Schedule?

Elliott Stapleton Corporation

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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About the Author

Elliott Stapleton

Elliott is a partner in the firm of Cornetet, Meyer, Rush and Stapleton, LPA. His business clients range from small single member companies to large privately held businesses. Elliott’s legal services include advice on Business Formation and Transactions, Real Estate Transactions, Trademark Law, Copyright Law, Estate Planning, and Probate Administration.