Reverse vesting

Reverse vesting is a contractual agreement that is often used in start-ups to ensure that founders and key employees remain committed to the company in the long term. In contrast to classic vesting, where shares or options are acquired over time, with reverse vesting the founders own their shares from the outset, but can lose some or all of them if they leave the company prematurely.

Definition and concept:

In the case of reverse vesting, the founders receive their full shares in the company immediately, but these shares are subject to a reverse transfer agreement. This agreement stipulates that the company or the other shareholders have the right to buy back part of the shares if the founder leaves the company before the end of a specified period.

How it works:

1. founders receive their full shares when the company is founded. 2. the shares are subject to a buy-back right, which is gradually reduced over a fixed period (typically 3-4 years). 3. if the founder leaves the company, the shares that have not yet been “vested” can be bought back by the company. 4. the repurchase price is often the nominal value or another predetermined lower amount.

Importance for startups and investors:

For start-ups: – Ensuring the long-term commitment of the founders – Protection against the loss of key persons in critical phases – Possibility of redistributing shares if a founder leaves For investors:
– Reducing the risk of an early founder exit
– Ensuring that founders “earn” their shares
– Protection of the investment by retaining key persons

Typical structures:

1. time-based vesting: shares are “vested” in stages over a fixed period (e.g. 48 months). 2. milestone-based vesting: shares are “vested” when certain company targets are reached. 3. cliff vesting: some of the shares are only “vested” after an initial period (e.g. 12 months). 4. accelerated vesting: in the event of certain events (e.g. sale of the company), all shares are vested immediately.

Negotiating points:

1. vesting period and structure 2. definition of trigger events (e.g. voluntary exit vs. termination) 3. repurchase price for non-vested shares 4. treatment in the event of death or incapacity of the founder 5. acceleration clauses in the event of company sale or other events

Advantages and disadvantages:

Advantages:
– Long-term commitment of founders to the company – Protection of the interests of all stakeholders – Flexibility in the redistribution of shares Disadvantages:
– Potential demotivation of founders due to perceived loss of control
– Complexity in legal implementation
– Possible tax challenges

Legal and tax aspects:

– Careful drafting of articles of association and ancillary agreements – Consideration of labor law implications – Potential tax implications when transferring and repurchasing shares – Adherence to compliance requirements and disclosure obligations

Strategic considerations for start-ups:

1. balancing founder motivation and investor protection 2. adapting the vesting structure to the specific corporate goals and phases 3. transparent communication of the reverse vesting conditions to all parties involved 4. regular review and, if necessary, adjustment of the agreements

Best practices for investors:

1. fair and standard market design of the reverse vesting conditions 2. consideration of individual circumstances and contributions of the founders 3. flexibility in handling special cases 4. involvement of experienced legal advisors to avoid pitfalls

Market trends and developments:

1. increasing standardization of reverse vesting clauses in startup contracts 2. adaptation to new working models (e.g. remote work, part-time founders) 3. integration of reverse vesting into more complex equity incentive structures 4. consideration of reverse vesting in international startup ecosystems

Conclusion:

Reverse vesting is an important tool in the startup ecosystem that serves to align the interests of founders, investors and the company itself. It provides a mechanism to ensure the long-term commitment of founders while protecting investors. It is critical for startups to structure reverse vesting agreements carefully to strike a balance between motivating and retaining founders on the one hand and protecting the company on the other. The flexibility that reverse vesting offers can be particularly valuable in responding to unforeseen developments in the early stages of the company. Investors should view reverse vesting as a strategic tool that not only protects their investment, but also contributes to the long-term stability and success of the startup. Fair and thoughtful structuring of agreements can help build a trusting and productive relationship between investors and founders. In a constantly evolving startup ecosystem, reverse vesting remains a relevant and important topic. The challenge is to design these agreements so that they are flexible enough to respond to different scenarios while remaining clear and enforceable. Careful planning and regular review of reverse vesting agreements can contribute significantly to the long-term success and stability of startups.