Vesting

What it means

Vesting is a mechanism by which a founder, manager or employee acquires their entitlement to a stake in the company or to options gradually over several years. If they leave early, they usually lose the part that has not yet vested, meaning the part they have not yet earned.

A typical arrangement is four-year vesting with a one-year cliff. Nothing vests during the first year; after a year a quarter vests at once and the rest monthly or quarterly. The aim is to motivate people to stay and to prevent a large stake from being held by someone who no longer works for the company.

Vesting is used in employee schemes such as an ESOP and between founders themselves, where it is set out in a shareholders’ agreement. Investors in a startup often require it because it protects them if a key founder with a large stake walks away.

How it works in practice

For startups, we help translate vesting into Slovak law. In an s.r.o. it is more complicated because transferring a stake requires a Commercial Register change, so options or contractual transfer obligations are often used. A simple joint-stock company offers more flexibility.

Part of the design is deciding what happens on departure: a good leaver, who leaves for an accepted reason, keeps the vested part, while a bad leaver, for example after a breach of duty, may lose even that or have to sell it at a low price. These rules must be precisely defined.

For tax, the questions are when and at what value taxable income arises: on grant of the option, on vesting or only when the stake is sold. The answer depends on the structure and current rules, so we always assess each scheme individually.

What to watch out for

The most common mistake is agreeing vesting only verbally or by email. In a dispute it is then hard to prove what was agreed. The rules must be in a written contract, consistent with the articles of association and the cap table.

Without vesting, there is a risk that one founder leaves after a few months with a third of the company while the others go on working for them too. That deters investors and is very hard to fix after the fact. Vesting is therefore best agreed from the very start.