Founders Flash: Key Vesting Terms Every Entrepreneur Should Know

Taking the leap into the world of entrepreneurship? The first step is to familiarize yourself with common startup terminology and industry lingo so you can enter your business meetings with confidence.

In this issue of the Flash, we are define three types of vesting terms every entrepreneur should understand. For more key terms, please check out our Deal Dictionary which is designed to help entrepreneurs understand the jargon that comes up in discussions with investors and legal counsel.

#1 Vesting (Right of Repurchase)

Vesting is the method of tying equity ownership to time served with the company. The most common vesting terms for employees is when 25% of equity vests after 1 year of service (often referred to as a “one-year cliff”), and the remainder vests monthly in equal installments over the next three years. Founders will often have different vesting schedules to reflect their early commitment to the company and higher level of involvement. A “Right of Repurchase” is the way vesting is implemented when founders or employees purchase or are granted stock (rather than options). In that case, the person “owns” and can vote all of the stock, but the stock is subject to the company’s right to buy it back at the purchase price when the person’s service to the company ends (subject to any acceleration provisions), and that right lapses at the rate of the vesting schedule (i.e. when the person is not vested at all, the company can buy back all of the shares, and when the person is fully vested, the company cannot buy back any shares).

#2 Double Trigger Vesting Acceleration

This is a type of accelerated Vesting that causes all or a portion of the shares to be deemed Vested upon the occurrence of a combination of two events, which are typically (1) a Change of Control and (2) an involuntary termination (customarily defined as termination without cause or a resignation caused by events/circumstances that essentially forced the person to resign) within some period after that Change of Control. Full acceleration pursuant to this version of vesting acceleration is generally acceptable to investors.

#3 Single Trigger Vesting Acceleration

This is a type of accelerated Vesting that causes all or a portion of a person’s shares to be deemed Vested upon the occurrence of a single event, which is typically (1) a Change of Control and/or (2) an involuntary termination (customarily defined as termination without cause or a resignation caused by events/circumstances that essentially forced the person to resign).

Also in this week’s Flash: