In various areas of law, there are some American adaptations in contracts, case law and other business models. In corporate law, specifically, there are contracts that have even kept their original name, such as the vesting contract.

As mentioned above, the vesting model emerged in the United States as a mechanism for managing shareholdings and retaining key talent for the operation of the company as a whole. Initially, the vesting contract was used in startups, as these early-stage companies often couldn’t afford to pay an employee or retain key talent for the company, and used this mechanism to offer the employee the chance to become a partner in the company.

Outside the start-up environment, vesting contracts are becoming increasingly popular with the aim of once again retaining key talent, given the competition in today’s markets. These contracts play a crucial role in aligning interests between founders, investors and employees, guaranteeing a secure structure for the acquisition of shares or equity over time.

Thus, vesting is an instrument or clause that offers the future opportunity to acquire a shareholding in a company in exchange for meeting certain targets or the passing of a pre-established period of time. Generally, this possibility of acquisition is progressive and divided up, according to the execution of what is established in the contract.

There are two possible types of vesting. Let’s see:

Classic Vesting

As mentioned above, classic vesting is a mechanism that aims to align the interests of founders and employees with the long-term success of the company. In this model, the company grants an employee or founder a specific number of shares or stock options, which will vest over a set period, known as the vesting period. This acquisition can be conditional on a period of permanence in the company, the achievement of specific goals, or both.

Main features:

• Vesting period: This is the time required for the employee or founder to fully acquire the rights to the shares or options granted. Generally, this period ranges from two to four years and may include an initial “cliff” of six months to one year, during which no shares are acquired.
• Cliff: If the cliff period is included, it runs from the employee’s start date at the company and serves as a period prior to the vesting period itself. After the cliff, the shares are acquired gradually, as stipulated in the contract.
• Gradual acquisition: After the cliff, the shares or options are acquired monthly, quarterly or annually, according to what has been agreed in the contract, until the end of the vesting period.

With regard to the employee’s actual entry into the company, this can occur with each percentage stake acquired, or, more commonly, after the total acquisition of the agreed percentage, by signing the corporate act or corporate book that includes the new partner in the company. This will depend on what is agreed between the parties.

Reverse Vesting

Reverse vesting is a less common model, but one that has proved useful in specific contexts, especially when looking for strategic hires for key positions. In this model, instead of employees acquiring shares over time, the company retains the shares and grants them based on the employee’s continuity and performance.

Main features:

• Immediate entry: Instead of acquiring shares progressively, the employee joins the company with an initial percentage of shares, which can increase or decrease according to the terms of the contract.
• Protection against departures: This model is particularly useful for protecting the company against the risk of key employees leaving before they have really contributed to the company’s growth.
• Buy-back clauses: Reverse vesting can include clauses that allow the company to recover shares or options if the employee leaves the company before completing the agreed period or fails to meet specific targets.

In this way, the employee starts working for the company in a different position, which can be an attraction for accepting the job, while the company protects itself against non-compliance with contractual targets and commitments. In the event of non-compliance, the shares can be bought back by the company, usually for the same amount paid by the partner. This type of contract is often used by companies in their early stages to avoid irresponsibility on the part of the employee towards the company, or by consolidated companies wishing to expand or innovate in strategic sectors.

Choosing the right model

The choice between classic vesting and reverse vesting depends on several factors, including the stage of the company, the profile of the employees or founders, and the long-term goals. To make the best decision, it is important to consult a team specializing in the subject, ensuring that your company is properly advised in planning the business model.

By: Maria Luisa Carvalho Teixeira
Corporate Law | CPDMA Team

References:

GANTOIS, Simone Menezes. The Vesting Contract and its application in Innovation in Brazilian Law. The Vesting Contract and its application in Innovation in Brazilian Law. Rio de Janeiro: Rio de Janeiro State University (UERJ), 2021. Accessed here. Accessed on: Aug. 28. 2024.

FELIX, Carolina Morena Lage. The contractual structure of the startup life cycle: from the pre-contractual relationship, to the corporate relationship and its social participations. 2019. Dissertation (Master of Laws) – Faculty of Law, University of Lisbon, Lisbon, 2019.