Imagine you start a company with several co-founders. At the beginning, everyone is fully committed, but over time one of them decides to leave while still retaining their equity stake.
This situation, more common than it may seem, can lead to significant issues, from shareholder conflicts to deadlock scenarios, especially when the departure occurs without prior notice.
To prevent these situations, a key tool is commonly used in corporate practice: vesting.
In this article, we analyse what vesting is, how it works and how to properly regulate it in a shareholders’ agreement, including the legal aspects that should be considered to avoid future risks.
Understanding what vesting is and how it works is essential for startups and companies with multiple shareholders.
What is vesting in a company and what is it for?
Index of contents
Vesting is a clause that allows a shareholder, founder or key employee to progressively earn rights over shares or incentives, typically based on time or the achievement of specific milestones.
Vesting in a shareholders’ agreement allows the consolidation of economic rights or the future acquisition of shares or equity to be linked to a period of continued involvement or the achievement of certain milestones. This aligns the interests of all shareholders from the outset.
In practice, vesting prevents a shareholder who leaves the project at an early stage from retaining a significant stake without continuing to contribute to the company’s development.
It is a contractual mechanism widely used in startups and growing companies, particularly when there are multiple founders or key employees.
Vesting is typically applied to incentives such as:
- Stock options, which grant the right to acquire shares or equity in the future at a predetermined price.
- Phantom shares, which do not involve actual ownership but provide an economic right equivalent to the value of shares, without granting shareholder status or voting rights.
In both cases, these rights vest progressively, helping to retain talent and protect the stability of the project.
How does vesting work?
Vesting operates through a system of progressive acquisition of rights. This means that the shareholder or beneficiary does not acquire all their shares from the outset but rather consolidates them over time.
It is generally structured through mechanisms such as call options or share transfer commitments.
This system is usually based on a predefined schedule set out in the shareholders’ agreement or relevant contract.
Vesting schedule
The vesting schedule establishes the time-based milestones at which rights are progressively consolidated. It commonly includes:
- Entry of the shareholder or beneficiary.
- Initial non-vesting period.
- Progressive accrual.
- Full consolidation of economic or ownership rights.
This structure links continued involvement in the project to the effective acquisition of equity.
Cliff: what it is and how it applies
The cliff refers to an initial period during which no rights are vested. In practice, it is often set at 12 months.
If the shareholder leaves before this period ends, they lose all rights. Only after this point does progressive vesting begin.
For example, if a shareholder has a 4-year vesting period with a 1-year cliff:
- If they leave before 12 months, they receive nothing.
- If they leave in month 18, they vest a proportional amount from year one.
- If they remain for 4 years, they vest 100%.
Progressive vesting of shares
After the cliff period, shares or rights vest progressively, typically on a monthly or annual basis, although this can be adapted to each case.
This system allows equity ownership to reflect the actual level of commitment to the project.
Why is vesting important in a shareholders’ agreement?
Particularly in early-stage projects and startups, vesting has become one of the most relevant clauses in shareholder agreements.
Without a clearly defined vesting mechanism, companies may face imbalances. For example, a shareholder may stop contributing to the project while retaining their equity.
This can also create difficulties in attracting investment or making decisions, ultimately affecting the stability of the business.
What should a vesting clause include?
Although vesting must be tailored to the specific corporate structure, a well-drafted clause should, at a minimum, regulate:
- Duration of the vesting period.
- Existence and length of the cliff.
- Vesting mechanism.
- Exit scenarios.
- Consequences for vested and unvested shares.
- Transfer or buyback mechanisms (such as call options) and their pricing or valuation method.
Exit scenarios (good leaver / bad leaver)
One of the most important aspects is defining what happens if a shareholder leaves the project. Two main scenarios are usually distinguished:
- Good leaver, where the exit is justified (for example, illness or mutual agreement).
- Bad leaver, where the exit is voluntary or detrimental to the company.
This distinction directly affects both vested and unvested shares.
For example, a bad leaver may be required to transfer even vested shares, typically under less favourable conditions (such as nominal value or a discounted price). In contrast, a good leaver generally retains the rights accrued up to that point.
Legal consequences (what happens if there is no vesting)
Poorly structured or absent vesting arrangements can lead to significant corporate issues: inactive shareholders holding substantial stakes, deadlock in strategic decisions or complications in investment rounds.
In many cases, the absence of such clauses can result in shareholder deadlock situations.
Common types of vesting
Not all vesting structures operate in the same way. The chosen model depends on the type of company, its stage of development and the profile of the shareholders or beneficiaries. The most common types of vesting structures include:
| Type of vesting | How it works | When it is used |
|---|---|---|
| Time-based vesting | Based on duration of involvement. | Founders and key employees. |
| Milestone-based vesting | Linked to achieving specific targets. | Startups with clear milestones. |
| Hybrid vesting | Combines time and objectives. | Complex or scalable projects. |
It is also common for founders to use reverse vesting schemes, where shares are allocated from the outset but are subject to a buyback right in favour of the company or the other shareholders in case of early departure.
Relationship between vesting and other shareholders’ agreement clauses
Vesting should not be analysed in isolation. Its effectiveness depends on how it interacts with other clauses, such as share transfer provisions, entry and exit mechanisms or corporate control rules.
In this context, its interaction with tag along and drag along clauses is particularly relevant, as these regulate share transfers and protect both majority and minority shareholders.
Where possible, it is also advisable to reinforce these provisions in the company’s articles of association to enhance enforceability against third parties.
Properly regulating vesting is not about copying standard templates, but about adapting each clause to the specific reality of the company and its shareholders.
At LEIALTA, we help startups and companies design tailored shareholders’ agreements that anticipate risks, prevent conflicts and support sustainable growth.
