Meaning
Equity structure mandating that a shareholder owns their shares upfront while the company retains the right to repurchase them. Through reverse vesting, the firm protects itself from the risk of a founder leaving shortly after receiving a large equity grant. The repurchase price is typically the original cost of the shares, effectively cancelling the unearned grant.
Ownership Rights
Unlike traditional options, shares under reverse vesting carry full voting and dividend rights from the day they are issued. The founder is the legal owner of the stock, but that ownership is subject to a schedule of lapsing repurchase rights. As time passes, the company loses the ability to buy back a portion of the shares each month or year.
Tax Implication
The primary driver for using this structure is the ability to file a Section 83(b) election with the tax authorities. This filing allows the holder of shares subject to reverse vesting to be taxed on the value of the stock at the time of issuance rather than as the vesting restrictions lift. If the value of the company increases, this can lead to substantial tax savings for the founder.
Failing to file the election within the strict thirty-day window can result in a massive tax bill later on. This mechanism balances the need for long-term commitment with the tax efficiency of early ownership.
Retention Goal
Long-term alignment between the individual and the organization results from this structure.