A Common Stock Purchase Agreement with Vesting (also called a “Restricted Stock Purchase Agreement”) sets forth the terms under which founders and early contributors (key employees and consultants for instance) may purchase their shares of Common Stock in your startup. This agreement may be referred to as a “Founder Stock Purchase Agreement” if the stock purchaser is one of your startup’s founders. Until founders officially purchase stock, for legal purposes your startup has no owners or stockholders.
A recipient/purchaser of shares of Common Stock under this agreement can pay for his or her shares with cash, by contributing intellectual property to your startup, by agreeing to cancel debt that your startup owes to him or her, by performing agreed-upon services for your startup, or by some combination of the aforementioned means. According to Delaware law, any of these means constitutes effective and valid compensation for shares of Common Stock, but if your startup was incorporated in another state, what is considered valid (or best practice) may be different. Shares of Common Stock under this agreement should be priced at fair market value – typically $0.0001 per share for a newly formed startup – and will often be subject to a right of repurchase clause (a “right of repurchase” allows your startup to repurchase the issued shares of Common Stock under certain conditions).
Because it is subject to a right of repurchase, the Common Stock purchased under this agreement is known as “restricted stock”. How does a right of repurchase work? It permits your startup to repurchase unearned shares of Common Stock from the recipient if said recipient’s employment terminates or said recipient ceases to provide your startup with agreed-upon services. So how many shares can your startup legally repurchase, and on what timetable? That depends. This is where “vesting” comes in. Vesting is a way for the Common-Stock recipient to earn his or her shares over months or years of service, by the meeting of certain goals, or by fulfilling or satisfying other outlined (agreed-upon) criteria.
The right of repurchase usually lapses over a four-year period (known as the “vesting schedule”), with 25% of the right of repurchase lapsing after 12 months and 1/48th of the right of repurchase lapsing in 36 equal monthly installments thereafter. This means that after 12 months or 1 year, your startup could potentially repurchase 75% of a recipient’s shares of Common Stock (under certain conditions such as his or her terminated employment or failure to perform the agreed-upon services). After 24 months or 2 years, your startup would have the right to repurchase just 50% of that recipient’s shares. At this point, the recipient’s shares of Common Stock would be considered 50% vested because half of them would be in his or her outright (full) control – not subject to a right of repurchase even if he or she was to be terminated by your startup, chose to voluntarily terminate his or her employment, or stopped performing any of the agreed-upon services. After 48 months or 4 years, that recipient’s shares of Common Stock would be considered “fully” or 100% vested. If unvested shares of Common Stock are repurchased, your startup must pay the original purchase price (the same $0.0001 per share) that the recipient paid.
Your startup can retain a right to repurchase vested shares of Common Stock too under certain conditions – chief among these the attempted sale (by the recipient) of his or her vested shares to a third party. However there is one qualification. Once the shares have vested, their original issuing price is no longer applicable. To repurchase them at this point, your startup must match whatever price the third party was prepared to offer.
Common Stock Purchase Agreements with Vesting for the core founder(s) or key executives of your startup may also include provisions that accelerate the vesting schedule under given conditions (called “accelerated vesting”). A “single trigger” acceleration means that, should your startup be sold, the recipient’s outstanding shares of Common Stock would immediately vest (fully or partially by the terms of the agreement). A “double trigger” acceleration means that a recipient’s unvested shares of Common Stock would vest if he or she was terminated within a specified time period (one year is standard) of your startup’s sale. The two triggers in this scenario would be: (1) the sale of your company, and (2) the termination of the recipient’s employment or services (as a result of that sale). Accelerated vesting of shares of Common Stock on a termination of employment prior to (or not in connection with) the sale of your startup is also possible.