TL; DR:

A vesting agreement (also called a vesting contract or vested equity agreement) sets out how founders, employees and advisors may earn ownership of a company over time. It aligns incentives, reduces the risk of “free-riders,” and is essential for startups, businesses seeking external fundraising and retention of key staff. In Hong Kong, share awards and options linked to employment typically fall under Salaries Tax, and enforceability of post-termination restrictions depends on reasonableness—so your paperwork and policy design really matter.

What is a Vesting Agreement?

If you have ever asked, “What are vesting agreements and how do they work?”—the answer is that a vesting agreement is a contract that links equity (such as shares, options, RSUs or tokens) to time or performance milestones. Normally, the equity is unvested until certain conditions are met. Before it vests in the holder, it can be forfeited or repurchased if the individual leaves the company or fails to meet agreed milestones.

Well-designed vesting contracts:

· Align incentives between the company and talent

· Deter early departures (no “free rides”)

· Signal governance quality to investors

For founders, this often takes the form of reverse vesting: founders hold shares up-front, but the company can repurchase unvested shares at cost if a founder departs before fully vesting.

Common Vesting Structures

1) Time-Based Vesting (with a Cliff)

· Standard: Four years with a 12-month cliff (no ownership rights during the first 12 months), then monthly or quarterly vesting.

· Why: Gives the company time to assess whether the holder of the vesting agreement is a good fit and discourages short-term churn.

2) Milestone- or Performance-Based Vesting

· Use when: Timing is uncertain or the role is KPI-driven (e.g., product launch, revenue targets).

· Tip: Define milestones precisely and specify who certifies completion.

3) Reverse Vesting for Founders

· Mechanics: The founder holds shares, but they are subject to repurchase until vesting completes. This protects both the team and future investors.

4) Acceleration (Single vs Double Trigger)

· Single-trigger: Vesting accelerates on a single event (often an acquisition).

· Double-trigger: Vesting accelerates only if two events occur—typically a change of control and a qualifying termination (e.g., without cause) within a set period post-deal. Double-trigger acceleration is more market-standard and acquirer-friendly.

What Actually Goes Into a Vesting Agreement?

1. Who + What: Parties, roles, and the equity instruments (shares, options, RSUs).

2. Grant / Purchase Details: Number of shares or options, exercise price (if any), escrow/administration.

3. Vesting Schedule: Duration, cliff, cadence (monthly/quarterly), and any performance criteria.

4. Company Repurchase / Forfeiture Rights: Especially important for reverse vesting on founder share).

5. Acceleration Provisions: Single or double-trigger rules, acquisition definitions, and caps.

6. Leaver Terms: Define “good leaver” vs “bad leaver,” notice, cause/constructive dismissal definitions.

7. Termination & Post-Termination Treatment: Clarify what happens to vested/unvested portions and option exercise windows.

8. Restrictions & Policies: Confidentiality, IP assignment; avoid over-broad non-competes (see HK note below).

9. Governing Law & Dispute Resolution: Typically, Hong Kong law for local teams and coordination if talent is cross-border.

10. Board/Shareholder Approvals + Cap Table Updates: Keep everything consistent with your ESOP/option plan rules.

Hong Kong–Specific Notes You Shouldn’t Skip

1) Tax Treatment (Salaries Tax)

· Share options linked to employment are generally taxed on exercise/assignment/release (i.e., not at grant).

· Share awards/RSUs are generally taxed when the restriction is lifted (i.e., at vesting) if they arise from employment.

· Always factor in withholding/reporting and cross-border mobility (e.g., split-year, source of employment). See the IRD and gov.hk guidance for current practice.

Further technical reading: IRD DIPN 42 (revised) discusses the interaction of accounting/tax treatment of financial instruments and includes commentary relevant to employee equity. Professional advice is strongly recommended.

2) Enforceability of Post-Termination Restrictions

In Hong Kong, post-termination restraints (non-compete, non-solicit and non-poach) are usually unenforceable and void unless reasonable and necessary to protect a legitimate business interest. Avoid blanket restrictions; tailor duration, scope, and geography, as courts will scrutinise any overreach.

Founder vs Employee: How the Paperwork Differs

· Founders: Reverse vesting on issued shares plus repurchase mechanics, sometimes with double-trigger acceleration to balance founder protection with acquirer comfort.

· Employees: Options (or RSUs) under an ESOP/Share Option Plan, with time-based vesting, standard exercise windows, and clear treatment on termination.

Practical Tips to Get Vesting Right (First Time)

1. Start with policy, not just a template. Document your equity philosophy: who gets what, when, and why.

2. Standardise schedules (e.g., 4-year / 1-year cliff) unless you have a strong reason to deviate.

3. Define “cause,” “good reason,” “good/bad leaver,” and change of control precisely.

4. Choose your acceleration carefully. Double-trigger is usually investor- and buyer-friendly; single-trigger can spook acquirers.

5. Synchronise documents: offer letters, option grant notices, shareholders’ agreements, IP assignment, and confidentiality agreements.

6. Mind Hong Kong tax timing: options at exercise; awards at vesting/restriction lift. Budget for payroll/tax compliance.

7. Keep a clean cap table with board approvals and leaver calculations.

8. Anticipate mobility—if employees relocate, vesting and tax exposure can change.

Common Mistakes We See (and How to Avoid Them)

· No reverse vesting for founders: Risk of a departed co-founder keeping a large stake with no ongoing contribution.

· Vague leaver/acceleration clauses: Leads to disputes at the worst possible time—M&A, down rounds, or exits.

· Over-broad non-competes: Often unenforceable in Hong Kong; tailor them surgically.

· Tax timing surprises: Failing to plan for the taxable event (exercise vs vesting) and reporting obligations.

FAQs

Is a vesting agreement legally required?

Not always, but investors expect founders to have vesting in place and employees to be covered by a formal plan.

What is the difference between a vesting agreement and a shareholders’ agreement?

A vesting agreement governs how and when equity becomes owned, while a shareholders’ agreement deals with broader company and shareholder rights.

What is double-trigger acceleration?

A clause that accelerates vesting only when two events occur (e.g., change of control and qualifying termination). It is commonly used and acquirer-friendly.

How are share options and share awards taxed in Hong Kong?

Generally, options tied to employment are taxed on exercise/assignment/release; share awards are taxed when restrictions lift (vesting). Always check the latest IRD guidance.

How TITUS Can Help

We design and implement founder reverse vesting, ESOPs/share option plans, vested equity agreements, and M&A-ready acceleration that stand up to investor and acquirer scrutiny—with Hong Kong tax and enforceability baked in.

Thinking about a vesting agreement or ESOP?

Email us at info@titus.com.hk or message us on LinkedIn to set up a quick consult.

Important Note

This article provides general information and does not constitute legal advice. You should seek advice tailored to your specific circumstances.

What are vesting agreements and how do they work?