What Is Share Vesting?
Granting shares and value to individuals whose level of contribution or effort does not align with the equity allocated is one of the most common and significant mistakes made by startup founders and business owners in the early stages of their ventures. This issue often leads to serious problems within the business, particularly when individuals who are no longer active in the company continue to claim ownership rights over their shares. In such situations, the initially allocated equity does not accurately reflect individuals’ true contributions, leading to an unfair distribution of shares.
The use of a vesting schedule, also referred to as share pledge or restricted equity, is a practical solution designed to prevent such outcomes. Under a vesting arrangement, each individual gradually acquires ownership of their shares over time, based on predefined criteria.
Important Legal Considerations in Drafting Vesting Clauses in Contracts
What Is Vesting?
Vesting refers to the process by which the shares of key individuals and founders become their definitive property over time through sustained activity and contributions within the company. At the outset of a startup, the company’s shares are typically allocated among the founders. However, if a founder decides to leave the company, the company retains the right to repurchase a specified portion of that founder’s shares.
For example, if a partner withdraws from a startup after only a few months of involvement, they are not entitled to claim the full value of the company’s future revenue. This is because, upon departure, the company may repurchase a portion of the shares allocated to the employee under the vesting arrangement.
Vesting mechanisms protect founders, reduce risk, and enable them to focus on their startup’s growth and development. Preparing a vesting agreement is one of the most important and professional steps to take before launching a business.
How Is Vesting Implemented in Iran?
Under Iranian law, the conventional vesting structure is not directly recognized in its standard international form. The commonly proposed legal mechanism is to initially register all partners as shareholders, with the distinction that the shares allocated to founders are pledged to the company.
If the founders fulfill their contractual obligations, the pledged shares are released and become fully owned by them. If they fail to meet their obligations, the shares may be transferred back to the company or to other shareholders, depending on the terms of the agreement.
Purpose of Drafting a Vesting Agreement
Since vesting agreements are relatively new in the context of emerging businesses, drafting such contracts is highly specialized. It requires the involvement of a qualified lawyer or contract expert with thorough knowledge of applicable laws and a clear understanding of startups’ operational structures.
Differences Between Commercial Companies and Startups
Companies and startups do not differ in registration procedures, as both follow the same formal process with the Companies Registration Office. The fundamental difference lies in the nature of their partners and capital structure.
In traditional commercial companies, two or more partners contribute financial capital, and shares are allocated in proportion to each partner’s contribution. In contrast, startups often lack significant initial financial capital. The primary asset of a startup is its idea. As a result, the initial shares of a startup typically have little or no monetary value. Investors are generally willing to purchase shares only after the idea has been developed into a product and has gained market acceptance.
Advantages of Implementing a Vesting Plan
- Share vesting increases shareholder motivation and encourages them to fulfill their commitments.
- Vesting ensures that only individuals who meet predefined objectives are included as shareholders or partners.
Contracts and agreements subject to vesting must be drafted with precision and clearly specify the vesting period, performance milestones, each party’s obligations, and the agreed percentage of shares.
Frequently Asked Questions About Share Vesting
Vesting refers to the allocation and ownership of shares based on time and performance, whereby individuals gradually acquire their shares over a defined period upon meeting agreed conditions.
Vesting prevents disputes among founders and shareholders and ensures that equity is earned only through continued contribution and fulfillment of obligations.
In Iran, vesting is commonly implemented by pledging shares to the company and releasing them to shareholders upon fulfillment of contractual obligations.
In commercial companies, initial capital determines share ownership, whereas in startups, share value depends primarily on ideas, effort, and performance.
Vesting increases motivation, ensures commitment, reduces risk, and prevents unfair distribution of shares.
A vesting agreement should specify the vesting period, share percentage, individual obligations, and conditions for termination or share repurchase. What is share vesting?
Why is vesting important for startups?
How is vesting implemented in Iran?
What is the difference between investing in startups and commercial companies?
What are the advantages of a vesting agreement?
What should be included in a vesting agreement?
