A vested share is a share that you can act on and sell. Share vesting for startups is where an employee is given share options, which can convert to shares at a pre-determined rate and date. There can be some personal tax liabilities for employees granted shares under a vesting schedule, depending on the type of shares, and the way the vesting schedule is structured. With the latest changes to the Federal Budget in 2015, shares given under an Employee Share Scheme will not be taxed until the option is exercised.
Employee Share Schemes
As a form of compensation, vested shares can also be part of an overall compensation package in an Employee Share Scheme. An employee share scheme (ESS) is a scheme under which shares, stapled securities, or rights to acquire them (ESS interests) in a company are provided to an employee or their associate in relation to the employee’s employment. With vested shares, you generally own the shares even if you are fired or quit.
Vestings and Startups in Australia
Vesting can take place through share subscription agreements, which can either be non-restricted or restricted. Non-restricted share subscriptions are normal share agreements. On the other hand, restricted share subscriptions are used when a co-founder’s share vests over time.
There are many benefits to share vesting, including employees can be incentivised to stay longer at the company, and employers have more capital to spend on growth and scaling, rather than on employee remuneration.
Standard Equity Structures and Cliffs
There is no such thing as a standard equity structure, as it depends on the startup and the industry of the startup. A common equity structure can differ for founders and advisors. For founders, a 4 year vest with a 1 year cliff is common for most startups. Meanwhile, for external advisors, 0.5-2% equity is common, with a 2 to 4 year vest and optional cliff.
When shares are tied to a ‘cliff’, this means the individual must be with the company for a year to vest the first increment. While one year is common, you could use any time period. Often co-founders are given some retrospective vesting credit for work done before the company was incorporated.
Share Vesting Agreements
At LegalVision, we can assist you with drafting and reviewing a share vesting agreement. This Agreement will contain clauses which state the amount of securities that vest in exchange for what effort and over what period of time. We have experienced contract lawyers who can review the contract to ensure it complies with the regulations of the Australian Securities and Investments Commission.
LegalVision has a team of startup lawyers who can assist you with your share vesting arrangement. Please call our office on 1300 544 755 and our Client Care team will happily provide you with an obligation-free consultation and a fixed-fee quote.