Vesting Schedule
Also known as: Share Vesting, Founder Vesting, Option Vesting, Cliff Vesting.
What is Vesting Schedule?
A vesting schedule is a contractual arrangement under which founder or employee shares, or share options, accrue to the recipient over time or on meeting milestones, with unvested portions forfeited or repurchased on early departure. It is a pure contract creation in South Africa, typically embedded in the MOI share-class terms, shareholders agreement, or employee share-option plan.
Drafted and reviewed by
Attorney & Founder, My-Contracts.co.za · Legal Practice Council of South Africa (LPC F17333)
Definition and context
A vesting schedule stages the acquisition of share or option rights over time or against performance milestones. On grant the recipient holds a contingent or "unvested" entitlement; as time passes or milestones are met, the rights "vest" and become the recipient's unconditional property. Unvested rights are typically forfeited, or repurchased at cost or nominal value, if the recipient leaves the company — distinguishing "good leaver" and "bad leaver" treatment. Vesting aligns founder and employee incentives with long-term company performance and protects the cap table against early departures.
South African law contains no statutory vesting regime — vesting is a pure contract creation under Section 15(7) of the Companies Act 71 of 2008 (where embedded in the MOI) or under ordinary contract law. The standard market formulation is four-year vesting with a one-year cliff: no shares vest for the first 12 months, at which point 25% vests in a single block, with the remaining 75% vesting monthly over the following 36 months. Variations include three-year vesting (common for mid-level hires) and milestone-based vesting (tied to revenue, product-launch, or fundraising KPIs — common for founder re-vest in venture-backed companies). Drafters must address accelerated vesting on trigger events: single-trigger acceleration (full vesting on sale of company) is founder-friendly but disfavoured by acquirers; double-trigger acceleration (sale plus involuntary termination) is market standard.
Tax treatment is critical. Section 8C of the Income Tax Act 58 of 1962 imposes income-tax treatment on "restricted equity instruments" (which include vesting shares) measured at vesting rather than at grant, meaning the employee is taxed on the market value at vesting less any price paid. This creates a material after-tax difference between shares granted outright (with vesting-based repurchase) and options granted now and exercised at vesting. Employee share schemes therefore typically use Section 8C-compliant structures with care taken over the timing of PAYE and the "base cost" reset for capital-gains purposes on ultimate disposal.
Where this term lives in law
Companies Act 71 of 2008
Sections: 15(7), 36
Governs the incorporation, governance, and winding-up of companies in South Africa.
Income Tax Act 58 of 1962
Sections: 8C
The principal statute governing the taxation of individuals and companies in South Africa.
Frequently asked questions
What is a typical vesting schedule for South African founders?
Four-year vesting with a one-year cliff is the market standard: nothing vests for the first 12 months, then 25% vests in a single block at the one-year anniversary, and the remaining 75% vests monthly over the following 36 months. Venture-backed companies sometimes re-vest founder equity on Series A closing, restarting the four-year clock.
How are vesting shares taxed in South Africa?
Section 8C of the Income Tax Act 58 of 1962 treats vesting shares as "restricted equity instruments" and defers the tax point to vesting. The employee is taxed on income-tax principles at vesting on the market value less any price paid, with PAYE applying. Subsequent gains on disposal above that vesting value are capital-gains subject to CGT, with the vesting value setting the base cost. Careful structuring is essential to avoid double taxation.
What is the difference between single-trigger and double-trigger acceleration?
Single-trigger acceleration fully vests unvested shares on one event — typically sale of the company — regardless of what happens to the employee. Double-trigger requires two events — usually sale of the company plus involuntary termination (or resignation for good reason) within a post-closing window. Double-trigger is market standard in venture transactions because acquirers prefer employee retention incentives to survive closing.
Can unvested shares be repurchased at cost if a founder leaves?
Yes, subject to the shareholders agreement or MOI expressly providing for it. "Bad leaver" repurchase at issue price (or nominal value) for resignation or dismissal for cause is enforceable. "Good leaver" treatment (death, disability, no-fault dismissal) typically repurchases at fair market value. Courts have upheld such provisions as commercial bargains, though abusive bad-leaver definitions are scrutinised for public-policy validity.
Contract templates using this term
1 template reference Vesting Schedule.