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Vesting clause

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What is the vesting clause?

The “vesting” clause is a mechanism used in agreements between partners or employees of a company that establishes a period of time during which they gradually acquire rights over certain shares or shares in the company.

It is used when you want to incentivize partners or employees to stay with the company for the long term, as it grants them ownership rights gradually rather than immediately. This brings together the interests of everyone involved and prevents potential problems if someone leaves the company early.

For example, a contract with a vesting clause might state that an employee will gain ownership of his stock options after working at the company for three years, with a vesting period over that time. If the employee leaves before the three years take place, he only purchases a fraction of those options based on time worked.

Essential content

  • The percentage of shares or stakes that are granted to partners or employees
  • The period of time during which the rights to the shares or participations are acquired
  • The conditions that must be met to acquire the rights over the shares or participations
  • The consequences in case of non-compliance with the conditions

Optional content

  • The conditions for the exercise of the right of resolution or compensation by the company, in case of breach of the clause by the partners or employees. These conditions must be clear and precise, and must respect the legal limits and the general principles of contractual law,
  • The possibility of assigning or transmitting the clause to third parties, by the company, in case of change of ownership or legal situation.

In which contracts is it usually applied?

Limitations

  • It may lose its effectiveness or validity if there is a change in the circumstances that led to its establishment.

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