Vesting Agreement

Mechanism of Improvement of investment and participation in technology startups

Antonio Rulli Neto1 Renato Asamura Azevedo2

1.

A new type of agreement

The so called vesting agreement is a mixture of an investment agreement and ensuring participation in business, of a particular company, with progressive acquisition of rights. It is a legal deal with contractual nature, in which someone, progressively, acquires rights about the participation in a company. Currently it has been used more frequently so that the most important talents and employees can be properly valued, especially in startups. In situations s of investment for a startup company growth, it is possible that not all of this investment comes in cash, but in the form of administration, through consultants, executives and big talents of the market. In simple words, startup is a company in which exists a product or a service with a promising business model that can be replicable and scalable, but in conditions of doubt. So, the vesting contract ensures the participation of the essential people that idealized or worked on the business. It is not a capital and industry company, in fact it was abolished by the Brazilian civil code of 2002. And it is neither its grand granddaughter, but actually a new form of legal business. Besides wages, this business participation is a way to retain the talents within the company and not lose them to other companies. People, over time become entitled to a certain number of shares. Initially, it is important to establish a memorandum of understanding to regulate all possible vesting contracts since the beginning of the company's constitution and its rules.
1

PhD from the Faculty of Law, University of Sao Paulo and the Faculty of Law at the Catholic University of Sao Paulo. Professor of Law Master of Information Society of the FMU. Lawyer in Sao Paulo.
2

Lawyer in Sao Paulo.

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Another important point is that the rights over the company or a particular product or a following market are from the beginning, clearly established and grow temporarily, that is, it is not advisable to give all of the percentage to which the person will have rights about, but it happens over time. If there is not this possibility, the advisable is that an eventual exit before the agreed time, abates gradually the established percentage. Let's see. Usually in technology startups, an investment will be made, with the perspective that the indispensable employees, eventually consultants or managers, will receive a percentage of that company after 2-3 years, and the founders after 3-5 years. This growth in the acquisition of rights over shares of the company should be progressive and must be reduced if the person leaves before the deadline. This prevents that a subject, having already received his total percentage of shares goes off the business before a minimum period, causing damage to it. It is also interesting to create a minimum time for the start of the acquisition of rights over the shares of the company. Thus, for example, one has the perspective of receiving 5% of the company after five years, being 1% a year, but having to stay two years to begin receiving these shares. If there is, after started the company’s activities, a capital investment, it may be also amended or not to the participation due to the vesting. By these points it is important to establish clearly the rules from the start in the MOU (Memorandum of Understanding or entrepreneurs).

2. Important points for a correct operation of Vesting
When starting a startup, if there is an investment or when preparing a vesting contract, it is important to look some points:
1. It is needed, from the beginning, to establish in MOU (Memorandum of

Understanding of Entrepreneurs) the operation of vesting and its rules, avoiding problems between the parties and investors; 2. The vesting contract itself must be made with the main rules established, especially percentages, time for acquisition of the rights, any subsequent capital investment, and how it will be in case of exit or death of the vester or the acquirer of rights; 3. It is important to establish tasks and liabilities of the parties for an eventually removal in case of non-compliance of tasks or essentials functions to the business. That is, it is important to define the functions within the activity and eventual targets (objective and clearly);

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4. When dealing with issues of technology development, always set in a very clear

and objective way in case of results, performances or goals, choosing alternative ways to resolve conflicts; 5. Since the rules are sufficiently established in MOU (Memorandum of Understanding of Entrepreneurs), it is possible to create different vesting contracts for the same company, creating specific rules for one or another contractor, establishing the confidentially of each contracts. Remember that it is not an employment relationship, but a relation purely civilian. Not forgetting also, that have the investment capital is far from mean be the stronger part, because who mastered the knowledge in these societies, has a lot of influence; 6. The creation of these contracts is really important to reduce the chances of future problems.

3. Conclusion
Vesting is a legal business, with a contractual nature, by which normally regulates a higher investment risk. The risks assumed by the parties, at least, minimally, should be described and should be taken into consideration in the development and interpretation of this business. This is a business for the development of new activities, among them those related to information society and internet companies.

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