From my interactions with small and growing businesses in over 5 years, one extremely important legal agreement that most
start-ups in Nigeria and even Africa are either unaware of or haven’t fully taken
advantage of is “the Vesting
Agreement”. Quickly, before we go into the nitty-gritty of a
vesting agreement, let me explain the terms “vesting” and “vesting agreements or clauses”, in the context
of its functionality to Nigerian or an African start-up.

Vesting is a process by which
benefits, privilege, authority, rights, or interest in an asset or
property passes unconditionally to a person; whether natural or
artificial person. A natural person being a human being or an
artificial person being a company or institution registered under law. In Nigeria, Kenya, and Ghana, vesting seem more common in an
area such as energy (in which electricity generation and distribution
companies entered a vesting agreement of 15 years or more in the
Nigerian case), and less and less in the start-up or tech space,
which is a huge error. Although, vesting is not expressly provided
for under the law, it is a smart business and contractual
consideration that can be enforced in the court like any other valid
contract.

Now, vesting agreement (or
clause) is an arrangement that spells out which benefits, privilege,
authority, rights, or interest in an asset or property (which
includes a start-up) accrues to who and at what time. Vesting
agreement ensures that at the beginning of the start-up, founders
get their full allotment of shares or equity stake to avoid double
taxation. Nevertheless, the company has the right to acquire a
percentage of a founder’s equity in case he or she walks away. This
means that if your partner walks away after a couple of months, he or
she will not be able to claim the full worth of the company after he or she walks, because the company would reserve the rights to acquire
the run-away partners’ equity when he or she leaves the company.

Some
years ago, a client who was referred to me called me up to explain that he and his friend developed an “App”, but after a while, the
other partner got tired and walked away, without looking back. My
client decided to keep working on getting traction and investments
for it, until one day, a member of the Lagos Angel Network (LAN)
offered to buy a large interest in it. This made the news, and it was
not long before the run-away partner called my client to ask for half the share of the monies received. This situation could have
been easily handled if there was a vesting agreement prepared by a lawyer who understands start-ups.

I will also like to cite the Facebook
case, since Mark visited Africa recently. Mark wouldn’t
have been “The Mark Zukerburg” we all know today if he did not have a legally binding vesting
agreement that secured his interests in Facebook, even in the midst
of all the law suits. How, you might ask? Remember, the movie, “The Social
Network?” Zukerburg’s friend (besides the twin brothers)
returned to demand for his stake as co-founder with significant
interest in Facebook, but his claims couldn’t hold water,
because the vesting agreement provided for a significant decline in
shares, if a founder was inactive.

In effect, vesting protects
partners from each other much more than a mere partnership agreement would do,and aligns incentives so everybody focuses
towards the common goal of building a sustainable, rewarding, and
successful business.  Now let me explain – unlike clauses in a partnership agreement,
vesting clauses for start-ups are usually prepared to last 4 years,
with a 1 year cliff. This means that if you had 50% equity and leave
after two years you will only retain 25%. The longer you stay, the
larger percentage of your equity will be vested until you become
fully vested in the 48th month (four years). Each month that you
actively work full time in your company, a 1/48th of your total
equity package will vest on you. However, because you have a one year
cliff, if one of the founders leaves the company before the 12th
month, then he or she walks away with nothing; whereas staying until
day 366 means you get one fourth of your stocks vested instantly. For
instance, if a company gained some traction and raised investment
during its 24th month, and the equity was divided 35% for yourself,
35% for your partner and 30% for the investors. Should your partner
walk away he will hold 17.5%. What happens with the other 17.5%? Nothing! It virtually disappears after the company has repurchased it
from your partner. Remember, when the company was registered, a fixed
number of shares- say 2,000,000 units – were issued to cover 100% of
equity. If the previously mentioned example occurs, 350,000 shares
vanish representing that 17.5%, bringing down the total to 1,650,000
shares. All the other shareholders benefit because they now have a
larger percentage of the company. On the other hand, if the start-up
gets acquired before the founders are fully vested, then each founder
(partner) vesting literally accelerates until all or at least
most shares get vested.

In conclusion, I hope you see the importance of a Vesting Agreement from the foregoing. If you are wondering what a Vesting Agreement looks like, you can study the example I drafted below. I will like to reiterate that it is important to seek legal support from a start-up
lawyer with the understanding of the business climate in your
country or state when considering a Vesting Agreement.

Sample Vesting Agreement

“Subject to terms of this
agreement, vesting will occur based on the following schedule:
Until
and through [FIRST VESTING DATE], neither Founder’s shares will
vest.
On and not before [FIRST VESTING DATE] – [25%] of each
Founder’s shares will vest.
On and not before the 1st of every
month thereafter, [1/36TH] of the remaining [75%]will vest.
Thus,
on [END DATE] (the “Full Vesting Date”), each Founder will
be 100% vested.
If either Founder ceases to provide services to
the Company, resigns from the Company, or is terminated from service
with the Company by a majority vote of the Founders according to
their respective ownership interests, with or without cause or good
reason, (the “Terminated Founder”) at any time prior to the
Full Vesting Date (the “Termination Date”), none of the
Terminated Founder’s additional shares shall vest. The Terminated
Founder’s shares which has not vested as of the Termination Date
shall be canceled or returned to the Company, and the Founder’s
ownership interest shall be reduced by the amount of invested shares
so canceled or returned. {Additional clause on
acquisition before full vesting} If both Founders are still fully
involved with the business and a liquidity event (such as the sale to
a third party, an initial public offering, or other liquidity event)
occurs, 100% vesting will occur immediately”.