In various areas of law, one can observe the presence of certain American adaptations in contracts, jurisprudence, and other business models. In corporate law, specifically, there are contracts that have even retained their original name, such as the vesting contract.

As previously mentioned, the vesting model originated in the United States as a mechanism for managing equity participation and retaining key talents crucial to the overall functioning of the company. Initially, the vesting contract was used in startups, as these early-stage companies often do not have the means to pay an employee or retain essential talent for the company. This mechanism offers the employee the opportunity to become a shareholder in the company.

Outside the startup environment, the vesting contract has become increasingly popular as a tool for retaining essential talent, considering the competitiveness of today’s markets. These contracts play a crucial role in aligning the interests of founders, investors, and employees, ensuring a secure structure for acquiring shares or equity participation over time.

Thus, vesting is structured as an instrument or clause that offers the future opportunity to acquire equity participation in a company in exchange for meeting specific goals or a predefined period of time. Typically, this acquisition is progressive and divided, in accordance with the terms set forth in the contract.

There are two types of vesting that can be applied. Let’s take a look:

Classic Vesting

As previously mentioned, 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 a specific amount of shares or stock options to an employee or founder, which will be acquired over a specified period, known as the vesting period. This acquisition can be conditioned upon a period of continued employment with the company, the achievement of specific goals, or both.

Main characteristics:

• Vesting period: It is the time required for the employee or founder to fully acquire the rights to the granted shares or options. 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 starts from the employee’s start date at the company and serves as a preliminary period before the actual vesting period begins. 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 was agreed upon in the contract, until the vesting period ends.

Regarding the employee’s actual entry into the company’s equity structure, this can occur with each percentage of equity acquired, or more commonly, after the full acquisition of the agreed percentage, upon the signing of the corporate document or shareholders’ book that includes the new partner in the company’s structure. This will depend on what is agreed between the parties.

Reverse Vesting

The Reverse vesting Reverse vesting is a less common model but has proven useful in specific contexts, especially when seeking 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 characteristics:

• Immediate entry: Instead of acquiring shares progressively, the employee enters the company with an initial percentage of shares, which may increase or decrease according to the terms of the contract.
• Protection against exits: This model is particularly useful for protecting the company against the risk of key employees exiting before they have truly contributed to the company’s growth.
• Repurchase clauses:  Reverse vesting may 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 goals.

Assim, o colaborador começa a atuar na empresa com uma posição diferenciada, o que pode ser um atrativo para aceitar o cargo, enquanto a empresa se protege contra o não cumprimento das metas e compromissos contratuais. Em caso de não cumprimento, as quotas/ações podem ser compradas pela empresa, normalmente pelo mesmo valor pago pelo parceiro. Esse tipo de contrato é frequentemente utilizado por empresas em fases iniciais para evitar a irresponsabilidade do colaborador com a sociedade, ou por empresas consolidadas que desejam expandir ou inovar em setores estratégicos.

Choosing the right model

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

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: Universidade do Estado do Rio de Janeiro (UERJ), 2021. Access here. Accessed on: Aug 28, 2024.

FELIX, Carolina Morena Lage. The contractual structure of the startup lifecycle: from the pre-contractual relationship, corporate structure, and its equity participation. 2019. Dissertation (Master of Law) – Faculty of Law, University of Lisbon, Lisbon, 2019.