The shareholders’ agreement is a fundamental document for start-ups, which regulates, among other aspects, the relationship between partners and the two-way relationship with the company. In this regard, one of the most important clauses regulated by the partners’ agreement is the permanence of certain key partners. In other words, when an investor invests in a project, he wants to know who is behind it and wants to make sure that the person who is driving the project will be linked to the company for a period of time.
Therefore, in cases where partners wish to leave the project , we find both clauses and tools to prevent key partners from leaving the project before it becomes profitable. This is what is known as a ‘standstill clause’.
The lock-inclauses, or ‘lock ups’, ensure that these partners can be kept in the company for a certain period of time, maintaining their specific functions.
It is common, in this sense, to see situations where two types of partners coexist in a company, on the one hand, the investment partners with the exclusive function of making the project grow, while on the other hand, we distinguish the partners who are familiar with the functioning of the company’s strategy. With the permanence clauses, the investment partners can ensure that the knowledgeable partners do not leave the project before it becomes economically feasible. In order to ensure that the partners remain in the project, the usual mechanism for this is through the consolidation of shareholdings, known as vesting.
What is vesting in the shareholders’ agreement?
Vesting in the partner agreement is a mechanism that makes the acquisition of a partner’s rights conditional on a certain period of time or the fulfilment of specific objectives, thus ensuring the commitment of the founding partners or key people in a start-up. This mechanism acts as a protective measure to mitigate the impact on the capital structure and the company in general, especially in the event of the exit of an important partner, avoiding ‘dead equity’ situations.
In shareholder agreements, vesting establishes conditions for the acquisition of shares, such as permanence in the company or the achievement of performance targets. Generally, 100% of a founding partner’s shares are subject to these conditions, which can vary in duration (between 2 and 4 years) and adjustments depending on the role and dedication performed.
Vesting can be based on either a time duration, fulfilment of key objectives, or the dedication of the partners, and can be accelerated through specific situations. Certain types of acceleration follow:
- Single Trigger acceleration: This consists of determining a condition that, if it occurs, automatically consolidates the participation that has not yet been consolidated to date.
- Double trigger acceleration: This consists of determining two conditions which, if they occur, the vesting is fully or partially accelerated.
The Cliff figure
There is also the so-called ‘cliff’ figure , which is the period of time that must elapse before the first shares of the shareholder in question are released, i.e. a period of time, usually one year, during which the vesting of the shares does not begin. That is, if the partner were to leave the project before this period, no shareholding would be vested. Once the cliff is over, the vesting period establishes the frequency of vesting (monthly, quarterly, etc.). For example, a 4:1 period means that, after one year of cliff, the shares vest over the next four years.
In summary, with tools such as vesting and cliff we can control the real impact on a company of partner departures, as well as being able to regularise the different ways of attributing shares to our partners and employees.
Article written by
Attorney – Corporate and M&A
pilar.casasnovas@metricson.com
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