What is Vesting (Equity Vesting)?

Vesting is an equity vesting mechanism used in the startup world to ensure fairness among co-founders, employees, and investors. The purpose is to incentivize an individual to contribute to the company for a specific period, ensuring they "earn" or "vest" their shares upon completion of that period.

This prevents a founder or employee who leaves the company prematurely from holding onto unvested shares, which would disrupt the startup's capital structure. Through this system, a founder or employee providing short-term contribution cannot immediately obtain all of their shares. This helps maintain both motivation and long-term commitment within the team.

Vesting's Equivalent in Turkish Law

The concept of "Vesting" is not directly regulated in Turkish Law. This structure originates primarily from the AngloAmerican legal system. Since there is no explicit reference to vesting agreements in the Turkish Commercial Code (TCC) (Türk Ticaret Kanunu – TTK) and the Turkish Code of Obligations (TCO) (Türk Borçlar Kanunu – TBK), such agreements are regarded as "atypical (innominate) contracts" in practice.

However, this does not imply that vesting is invalid. Valid and effective vesting plans can be prepared using various legal mechanisms available under Turkish law.

There are three most common methods for the compatible and effective implementation of vesting plans within Turkish law: The first is the issuance of new shares through a conditional capital increase, provided the relevant provision exists in the company's Articles of Association. Secondly, the vesting plan can be secured by a commitment to transfer shares from existing shareholders; in this model, existing shareholders commit to transferring their shares to employees when the vesting is complete. The third and final method is the company transferring its own shares to employees; this application is generally carried out using the limited number of shares the company is legally allowed to acquire under the TCC.

Types of Vesting

• Founder Vesting (Reverse Vesting): Founders receive their shares upfront but gradually vest them as they remain with the company. If one of the founders leaves early, the unvested shares are returned to the company.

• Employee Vesting (ESOP – Employee Stock Option Plan): Used to increase employee loyalty to the company. Employees acquire the right to shares or options after working for a certain period or achieving performance targets.

  
  

Why is it Important?

The vesting mechanism is critical for the sustainability of a startup. A simple example: if a plan is established where each of the five founders vests 20% equity over four years, each would hold 5% equity at the end of the first year. Their equity stake increases as they remain with the company. This system prevents departing partners or employees from obtaining shares they haven't earned.

Conclusion

Vesting is a system that supports the long-term success of startups and strengthens team commitment. However, since it is not directly regulated under Turkish law, such plans must be meticulously prepared within the framework of the Turkish Commercial Code, the Code of Obligations, and related legislation.

Vesting structures are legal instruments that align the timing of employee vesting and performance criteria with the company's strategic goals. Improperly structured vesting agreements can lead to serious disputes in the future.

The academic and practical work we conduct aims to create a solid legal foundation for the sustainable growth of ventures while increasing employee commitment.

This content is for general informational purposes only; it does not substitute for professional legal advice regarding specific cases.