How to Set Effective Conditions

Ideas for setting impactful goals that align with your business objectives.

Looking for inspiration on goals and milestones to motivate your team? Vestd gives you the flexibility to set various conditions to reward recipients with options or shares.

You can tie these rewards to specific targets, so once a recipient hits a goal, their equity unlocks, and can start vesting. How great is that?

Contents📋

• Be specific
  - Numbers vs percentages
  - No room for ambiguity
  - Define terms

• What to avoid
• Examples
  - Time-Based Conditions
  - Financial Conditions
  - Value-Based Conditions
  - Output-Based Conditions
  - Funding Conditions
  - Participation Conditions
  - Time-Based Tiered Conditions
  - Generated Revenue Tiered Conditions
  - Exit Value Tiered Conditions

 

Be specific 

Numbers vs percentage

Remember to specify the exact number of shares a recipient will receive upon meeting the criteria, rather than a percentage of equity. This ensures clarity and fairness in your scheme.

 

No room for ambiguity

These conditions might not be reviewed again until the time of exercise or during due diligence. If there’s any ambiguity, it could lead to challenges that might impact both the recipients and the company. To avoid this, it's important to be clear and precise from the start!

 

Define terms

To keep things clear and to steer clear of potential challenges down the line, make sure to clearly define any terms that aren't already covered in the option agreement. This way, you’ll prevent any misunderstandings and keep everything on track! 

 

 

To avoid potential legal challenges, it's crucial to be clear with the terms you use. For example, during an exit event, the purchasing company’s lawyer will potentially review your option agreements. If they spot any vague or unclear language, they may challenge the vesting criteria, which could complicate the entire process. Clear terms help ensure everything goes smoothly when it matters most.

The definition should be meticulously defined. 

Here’s an example of the level of detail we recommend when defining terms.

• A "secondary sale" refers to the resale of previously issued shares or equity by an existing shareholder to another investor or third party, where no new shares are created or issued by the company, and the company does not receive any proceeds from the transaction.
• "New business growth" refers to the increase in revenue, market share, or overall size of a company that results from acquiring new customers, entering new markets, or launching new products or services.
• An “Exit” refers to a change in the legal or beneficial ownership of shares in a company’s share capital, whether through a single transaction or a series of transactions, including but not limited to share transfers and new share issuances. This change results in a party acquiring a Controlling Interest in the company, where that party either was not a shareholder prior to the transaction or held less than a Controlling Interest before the change in ownership.

 

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What to avoid

So with this in mind, to ensure everything runs smoothly, please avoid setting criteria that are vague or hard to measure, such as:

• “Recipient must do a good job”
• “Recipient must exceed targets”
• “TBC” (To Be Confirmed)
• “Recipient must show 100% dedication, commitment and keep clients and staff happy”

Instead, try to be as specific and clear as possible with your criteria to avoid any confusion or issues later on.

 

 

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Vestd allows you to create a scheme tailored to your business objectives. Here are a few popular examples to get you started...

 

Time-Based Conditions

X number of options/shares will vest upon the recipient’s achievement or completion of:

• Remains part of the team for a certain period or until a specific date.
• Works X days/weeks per month (ideal for non-executive directors and consultants).

Financial Conditions

X number of options/shares will vest upon the recipient’s achievement or completion of:

• £X in sales (can be tiered) over X time period
• Client work valued at £X or more over X time period
• X profit goal is reached over X time period
• X positive profit margin reached over X time period
• x revenue goal is reached over X time period
• X revenue + gross margin target is reached over X time period
• X revenue run rate of over £X per month for an agreed period of time.
• £X in new business generated over X time period
• £X in upsells generated over X time period
• A maintained or reduced churn rate over X time period
• Reduced costs over X time period

 

Value-Based Conditions

X number of options/shares will vest upon the recipient’s achievement or completion of:

• Reaches a valuation of £X by a specific date.
• Company/Business is sold for £X.

 

Output-Based Conditions

X number of options/shares will vest upon the recipient’s achievement or completion of:

• The delivery of an agreed project by X date
• The creation of X blog posts per month by X date
• Meeting KPIs by X date (year 1, year 2 year 3 etc)
• Achieving a specified number of referrals by X date

 

Funding Conditions

X number of options/shares will vest upon the recipient’s achievement or completion of:

• Secures £X in funding.
• Completes a funding round (options issued after funding).

 

Participation Conditions

X number of options/shares will vest upon the recipient’s achievement or completion of:

• Completing X actions/activities by X date
• Referring X users to the platform by X date
• Achieving an average rating of X by X date
• Reaching an engagement score of X by X date 

Another format that's becoming more popular on the Vestd platform is tiered conditions, where the better a recipient performs, the more equity will vest/become unconditional. Here are a few examples...  

 

Time-based tiered conditions 

• Work an aggregate of at least 20 hours but less than 30 hours per week from the date of DD/MM/YYYY to DD/MM/YYYY for 100 shares to become unconditional. 
• Work an aggregate of at least 30 hours but less than 40 hours per week from the date of DD/MM/YYYY to DD/MM/YYYY for 200 shares to become unconditional. 

 

Generated revenue tiered conditions 

• Generate between £50,000 and £99,999.99 of new annual recurring revenue between DD/MM/YYYY and DD/MM/YYYY for 500 shares to become unconditional.
• Generate between £100,000 and £499,999.99 of new annual recurring revenue between DD/MM/YYYY and DD/MM/YYYY for 1,000 shares to become unconditional.

 

Exit value tiered conditions 

• If the business is valued between £1,000,000 and £2,000,000 at exit, 100 shares will become unconditional. 
• If the business is valued between £2,000,000 and £5,000,000 at exit, 200 shares will become unconditional. 

 

You have complete flexibility to tailor your conditions to effectively reward recipients for achieving business goals. However, please note that altering the criteria after a recipient has accepted their share scheme agreement is generally not recommended. For further details, please consult our guide on "Changing the Conditions of an EMI Option Agreement" and refer to HMRC’s guidelines.

 

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'