What are authorized shares, vesting, cliffs and triggers in a startup?
When you are starting a business or a startup, it is important to understand the key terminologies which are essential in each business. Shares, authorized shares, vesting, cliff and trigger are some of these key terms. The moment you plunge into pointing out startup equity compensation, you're slammed from all sides with a bunch of words you may have heard in the past and you may be able to pretend knowledge of at a networking event. Understanding these basic concepts will help you protect the interests of your business or startup in a better way.
Understanding Shares
In many cases the terms stock and equity are used pejoratively. Stock is a general term relating to an undetermined amount of ownership interest in a company. Shares are a way of dividing a company's stock. A stock of a company can be split into a practically infinite number of shares, each valuing precisely the same amount.
Shares in the startup have a fixed price in a priced equity round and investors can buy equity in the company by buying shares at the price during that round.
What are authorized shares?
Authorized shares are the amount of shares of stock that a business may issue to investors or employees at the moment they incorporate and stock shares that may be issued later by the company board of directors as set out in the Articles of Incorporation.
Authorized shares may be provided when a company requires funds. They may also be made available as a benefit to key employees. The number of shares that are authorized is usually much greater than what is actually required. This is to enable the company to issue stocks when required in the future. A company may refrain from issuing all of its authorized shares to maintain the company's controlling interest and thus prevent hostile takeovers.
Vesting, Cliff and Trigger
Vesting is the act of gaining complete legal rights to something. In compensation terms, founders, executives and workers in a particular startup usually obtain increasing rights over time, subject to limitations, to their equity award. People may refer to the vesting of their shares or stock options, or may say a person is vesting or has fully vesting.
In most cases, vesting takes place progressively over time, as per a vesting plan. A person only vests while they're working for the startup. If the person quits or is immediately terminated, they will get no equity and if they remain for years, they will get most or all of it. Stock awards, stock options, and RSUs are nearly always subject to a vesting schedule.
The vesting schedule could accelerate to a particular instance. The instance typically involving acceleration involves acquiring a business. In this case, there are essentially two different accelerating scenarios, Single and Double Trigger Acceleration: In single, an event triggers vesting acceleration, meaning the owner of the equity will receive the entire or partial stock value. For eg, if the business was acquired the full equity would be received by the founder or employee with a single trigger acceleration scheme.
In double trigger acceleration, two events are required to trigger the acceleration of vesting, resulting the equity owner to receive the full or partial value of the stock. For example, the company is acquired (event one) and the founder or employee’s contract with the company will determinate (event two).
There are as many possibilities to schedule your vesting as startups do. One should not simply copy what other businesses have done, but look at every individual situation carefully for their startup.
For more information on shares, authorized shares, vesting, cliff and trigger in a Startup, visit www.startglobal.co
*Disclaimer*: Sieve, Inc. or StartGlobal is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Sieve, Inc. or StartGlobal is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Sieve, Inc. or StartGlobal.
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