Reverse Vesting Agreement

A reverse vesting agreement is an agreement through which a shareholder will become fully entitled to their shares over a period of time (the “vesting period”). Once a shareholder is fully entitled to shares, those shares are referred to as “vested shares”. The shares to which the shareholder is not yet fully entitled are referred to as “unvested shares”. These arrangements also often use the term “cliff” to refer to the initial period of time before any shares vest.

The vesting agreement would describe the events which, if they occur during the vesting period, would give the corporation the right to buy back the unvested shares. Often they are repurchased for the price the shareholder initially paid for the shares.

For example, a reverse vesting agreement could use a 4 year vesting period, where shares vest quarterly, and with a 1-year cliff. In this case, 25% of the shares would vest after the first year and, then 6.25% of the shares would vest every subsequent three months.

In a reverse vesting arrangement, the shareholder gets all of their shares right away, but over time, fewer shares become subject to the corporation’s repurchase right. This is different than an option agreement where, over the vesting period, the option holder will acquire the right to purchase shares. Reverse vesting arrangements are generally used with founding shareholders. They are a mechanism which either founders or investors use to ensure the founders remain with the corporation.