Reverse Vesting

Founder’s shares are created at company formation for a nominal value and granted all at once.

Reverse vesting is called “reverse”, because it’s the opposite of how employee stock options work, where they vest the right to purchase shares, vs. for founders, they vest the right to hang on to shares they already own.

This protects an early founding team who might have a founder leave early.

Upcounsel has a pretty good definition:

Reverse vesting occurs when a company’s co-founder receives his or her shares and ownership interest upfront. This exchange is subject to vesting similar to employee stock options. If the co-founder leaves, the company may repurchase a set amount of those shares.

The founder already owns all the shares with reverse vesting and may be forced to sell a specific percentage of them for no profit if the complete vesting period hasn’t been finished. Reverse vesting is a term used to define a specific situation where an independent contractor or an employee gets stock that’s subject for the company to repurchase at-cost. The right to repurchase lapses the vesting period.

This is the opposite of a normal situation, where a provider for a service gets the right to buy stock or an option, but he or she can’t use that right until the provider vests. Many investors and employees must earn shares by staying with the company for a while through a vesting provision or from buying the equity. Founders have an advantage over them, as they get equity with the company from their first day of employment.

Many VC term sheets and founder agreements won’t allow founders complete control of their shares if they terminate their employment before the reverse vesting period is over, which is often four years. These agreements let the company buy back the rights to the shares that aren’t yet mature for a small fee, or sometimes for free.

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