‘Vesting’, in general terms, refers to the act of bestowing or conferring something to another.
In the legal and business context, the act of vesting usually involves trusts, shares and options. When an individual has something vested to them, they now own and control it.
A vesting date is a predetermined time for when the shares, options or trust will be fully given to its rightful beneficiary. There’s a bit more to it than just setting a particular date, though – we’ll explore this in more detail in this article.
What Does Vesting Date Mean In Trusts?
In a trust context, a vesting date is where the beneficiaries of a trust receive their share of the trust, effectively closing down the trust. Under Australian law, trusts generally cannot operate over a certain amount of time and all trusts must eventually be vested.
Andrew is the beneficiary of a trust set up by his grandparents on the day he was born. The vesting date of the trust has been set to 21 years.
Andrew will be able to access his trust and become the owner of everything in it on his 21st birthday.
When Is The Vesting Date Of A Trust?
In Australia, the vesting date of a trust is set out in the Trust Deed of each trust, and is generally required to be no more than 80 years after the trust has been started.
In some places, such as South Australia, this rule does not apply. On the vesting date, any matters regarding the trust will be taken care of (such as debts) prior to the transfer to the beneficiaries.
After the vesting date, there is no further need for the trust and it’s likely to be wound up.
What Is Share Vesting?
Share vesting is a process by which founders, employees or other shareholders in an organisation are entitled to receive certain shares subject to certain ‘vesting conditions’. The conditions may be time-related (e.g. ‘You must continue working at the company for X years in order to vest 5% of your shares) or they may be milestone related (e.g. ‘You must hit X sales target in order to vest 2% of your shares). Typically, share vesting is used as a mechanism for incentivising actions or encouraging retention.
Do I Need A Share Vesting Agreement?
Share vesting is often documented in a Share Vesting Agreement is a legally binding document between a company and its shareholders. The agreement is the formal documentation that sets out the conditions under which the company will issue the relevant shareholder shares.
A Share Vesting Agreement can include details such as:
- The amount of shares in question
- The value of the shares
- The share vesting date or other vesting conditions
- What happens if the prospective shareholder does not meet the conditions
Share vesting can also be documented via an Employee Share Schemes (ESS) or an Employee Share Option Plan (ESOP).
Vesting For An Employee Share Option Plans & Share Schemes
Employee Share Schemes (ESS) allow employees to receive shares in a company. Employee share option plans (ESOPs) are similar – they allow employees to receive options to purchase shares at their company (usually at below market value). ESOPs and ESSs give employees the opportunity to own shares in the company and participate in the benefits of it’s growth and future value.
Similar to Share Vesting Agreements, an ESOP or an ESS can be used to incentivise employees, particularly for startups that do not have the revenue to appropriately reimburse their staff. Under ESOPs and ESSs, employees are usually granted options or shares subject to a vesting date or other vesting conditions. The vesting date and other conditions can help encourage staff retention and high performance.
Hayley is part of an ESOP at a startup company she works at. The conditions of the ESOP guarantee Hayley her right to buy shares at a low price once she has worked at the company for three consecutive years.
After 3 years of employment, Hayley has satisfied the requirements and is entitled to have her options vested. This means she can now purchase shares in the company at the low price.
Grant Date Vs Vesting Date
The grant date is also an important concept in relation to trust, shares and option vesting.
In essence, the grant date is when the trust, shares or options are agreed to be issued to the relevant party. The grant date is usually the date the original agreement or deed relating to the trust, shares or options was signed (unless another date is specified in those documents). The vesting date is the date where the trust, shares or options become available to the beneficiary, subject to the vesting conditions being met.
The vesting mechanisms of trusts, shares and employee options can be complex and may have significant financial or other implications, and so it’s important to ensure that the documentation that establishes the vesting process is drafted correctly and followed. It’s always best to seek the help of a legal professional if you need any further clarification regarding vesting.
To summarise what we’ve discussed:
- Vesting is a general concept which is relevant to trusts, shares and options
- In trusts, the vesting date is where the trust ends and the beneficiaries are able to collect their part of the trust.
- Trusts must be vested within 80 years in most parts of Australia
- Share vesting is a process by which shares in a company are issued to shareholders subject to conditions being met
- Share vesting may be done via Share Vesting Agreements, Employee Share Schemes or Employee Share Option Plans
If you would like a consultation on vesting dates or trusts for your company, you can reach us at 1800 730 617 or email@example.com for a free, no-obligations chat.
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