From my interactions with small and growing businesses in over 5 years, one extremely important legal agreement that most
\nstart-ups in Nigeria and even Africa are either unaware of or haven’t fully taken
\nadvantage of is “the Vesting
\nAgreement”. Quickly, before we go into the nitty-gritty of a
\nvesting agreement, let me explain the terms “vesting” and “vesting agreements or clauses”, in the context
\nof its functionality to Nigerian or an African start-up.<\/p>\n
Vesting<\/u> is a process by which
\nbenefits, privilege, authority, rights, or interest in an asset or
\nproperty passes unconditionally to a person; whether natural or
\nartificial person. A natural person being a human being or an
\nartificial person being a company or institution registered under law. In Nigeria, Kenya, and Ghana, vesting seem more common in an
\narea such as energy (in which electricity generation and distribution
\ncompanies entered a vesting agreement of 15 years or more in the
\nNigerian case), and less and less in the start-up or tech space,
\nwhich is a huge error. Although, vesting is not expressly provided
\nfor under the law, it is a smart business and contractual
\nconsideration that can be enforced in the court like any other valid
\ncontract.<\/p>\n
Now, vesting agreement (or
\nclause) is an arrangement that spells out which benefits, privilege,
\nauthority, rights, or interest in an asset or property (which
\nincludes a start-up) accrues to who and at what time. Vesting
\nagreement ensures that at the beginning of the start-up, founders
\nget their full allotment of shares or equity stake to avoid double
\ntaxation. Nevertheless, the company has the right to acquire a
\npercentage of a founder’s equity in case he or she walks away. This
\nmeans that if your partner walks away after a couple of months, he or
\nshe 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
\nthe run-away partners’ equity when he or she leaves the company.<\/p>\n
Some
\nyears 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
\nother partner got tired and walked away, without looking back. My
\nclient decided to keep working on getting traction and investments
\nfor it, until one day, a member of the Lagos Angel Network (LAN)
\noffered to buy a large interest in it. This made the news, and it was
\nnot long before the run-away partner called my client to ask for half the share of the monies received. This situation could have
\nbeen easily handled if there was a vesting agreement prepared by a lawyer who understands start-ups.<\/p>\n
I will also like to cite the Facebook
\ncase, since Mark visited Africa recently. Mark wouldn’t
\nhave been “The Mark Zukerburg” we all know today if he did not have a legally binding vesting
\nagreement that secured his interests in Facebook, even in the midst
\nof all the law suits. How, you might ask? Remember, the movie, “The Social
\nNetwork?” Zukerburg’s friend (besides the twin brothers)
\nreturned to demand for his stake as co-founder with significant
\ninterest in Facebook, but his claims couldn’t hold water,
\nbecause the vesting agreement provided for a significant decline in
\nshares, if a founder was inactive.<\/p>\n
In effect, vesting protects
\npartners from each other much more than a mere partnership agreement would do,and aligns incentives so everybody focuses
\ntowards the common goal of building a sustainable, rewarding, and
\nsuccessful business.\u00a0 Now let me explain – unlike clauses in a partnership agreement,
\nvesting clauses for start-ups are usually prepared to last 4 years,
\nwith a 1 year cliff. This means that if you had 50% equity and leave
\nafter two years you will only retain 25%. The longer you stay, the
\nlarger percentage of your equity will be vested until you become
\nfully vested in the 48th month (four years). Each month that you
\nactively work full time in your company, a 1\/48th of your total
\nequity package will vest on you. However, because you have a one year
\ncliff, if one of the founders leaves the company before the 12th
\nmonth, then he or she walks away with nothing; whereas staying until
\nday 366 means you get one fourth of your stocks vested instantly. For
\ninstance, if a company gained some traction and raised investment
\nduring its 24th month, and the equity was divided 35% for yourself,
\n35% for your partner and 30% for the investors. Should your partner
\nwalk away he will hold 17.5%. What happens with the other 17.5%? Nothing! It virtually disappears after the company has repurchased it
\nfrom your partner. Remember, when the company was registered, a fixed
\nnumber of shares- say 2,000,000 units – were issued to cover 100% of
\nequity. If the previously mentioned example occurs, 350,000 shares
\nvanish representing that 17.5%, bringing down the total to 1,650,000
\nshares. All the other shareholders benefit because they now have a
\nlarger percentage of the company. On the other hand, if the start-up
\ngets acquired before the founders are fully vested, then each founder
\n(partner) vesting literally accelerates until all or at least
\nmost shares get vested.<\/p>\n
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
\nlawyer with the understanding of the business climate in your
\ncountry or state when considering a Vesting Agreement.<\/p>\n
\u00a0<\/span><\/u><\/p>\n Sample Vesting Agreement<\/span><\/u><\/p>\n “Subject to terms of this How To Effectively SafeGuard Y…<\/p>\n","protected":false},"author":1036,"featured_media":41743,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[366,327,362],"tags":[622,415,623,599],"class_list":["post-38994","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-for-startups","category-how-to","category-legal","tag-legal","tag-msmes","tag-nigerian-msmes","tag-vesting"],"yoast_head":"\n
\nagreement, vesting will occur based on the following schedule:
\nUntil
\nand through [FIRST VESTING DATE], neither Founder’s shares will
\nvest.
\nOn and not before [FIRST VESTING DATE] – [25%] of each
\nFounder’s shares will vest.
\nOn and not before the 1st of every
\nmonth thereafter, [1\/36TH] of the remaining [75%]will vest.
\nThus,
\non [END DATE] (the “Full Vesting Date”), each Founder will
\nbe 100% vested.
\nIf either Founder ceases to provide services to
\nthe Company, resigns from the Company, or is terminated from service
\nwith the Company by a majority vote of the Founders according to
\ntheir respective ownership interests, with or without cause or good
\nreason, (the “Terminated Founder”) at any time prior to the
\nFull Vesting Date (the “Termination Date”), none of the
\nTerminated Founder’s additional shares shall vest. The Terminated
\nFounder’s shares which has not vested as of the Termination Date
\nshall be canceled or returned to the Company, and the Founder’s
\nownership interest shall be reduced by the amount of invested shares
\nso canceled or returned.\u00a0<\/span>{Additional clause on
\nacquisition before full vesting} If both Founders are still fully
\ninvolved with the business and a liquidity event (such as the sale to
\na third party, an initial public offering, or other liquidity event)
\noccurs, 100% vesting will occur immediately”<\/span>.<\/p>\n","protected":false},"excerpt":{"rendered":"