If you’re a startup founder in Ontario, you may have heard the term “vesting schedule” thrown around when discussing equity distribution. But what exactly is a vesting schedule, and why is it important for your startup?
In simple terms, a vesting schedule is a timeline that determines when a startup founder or employee will have full ownership of their equity stake in the company. It’s designed to incentivize long-term commitment and ensure that equity is distributed fairly.
For example, let’s say you and your co-founders start a new tech company. You each receive 25% equity in the company, which is subject to a four-year vesting schedule with a one-year cliff. This means that none of you will own any equity until you’ve been with the company for at least a year. After that, your equity will vest monthly over the remaining three years.
If one of you were to leave before the end of the first year, they wouldn’t receive any equity. If they left after 15 months, they would own 25% of their equity. If they left after three years, they would own 75% of their equity, and if they stayed for the full four years, they would own 100%.
Vesting schedules can be customized to fit the needs of your startup, and they can also include acceleration clauses that speed up vesting in certain situations. For example, if the company is acquired or goes public, founders and employees may receive accelerated vesting of their equity.
Why is a vesting schedule important for startups? For one, it ensures that all parties are committed to the long-term success of the company. If someone is given equity upfront without any vesting, they could potentially walk away from the company after a short period of time and still hold a significant amount of equity.
In addition, a vesting schedule can help prevent disputes between co-founders or employees over equity ownership. By having a clear timeline in place, everyone knows exactly how much equity they own and when they will receive it.
If you’re starting a new business in Ontario, it’s important to consult with a startup lawyer who can help you navigate the complexities of equity distribution, including vesting schedules. A lawyer can help you draft a vesting schedule that works for your specific situation and ensure that it’s legally binding.
At Falcon Law PC, our Ontario startup lawyers have years of experience working with entrepreneurs and startups. Contact us at 1-877-892-7778 or info@falconlawyers.ca to learn more about how we can help you with your startup’s legal needs.
