Unvested Shares in NZ Employee Share Schemes: Vesting and Leaver Rules

If you’re thinking about offering equity to employees (or you already have), you’ll almost certainly come across one tricky concept: unvested shares.

Used well, unvested shares can help you attract great people, align incentives, and protect your business if someone leaves early. But if the vesting terms and paperwork aren’t set up properly from day one, equity can quickly turn into a dispute you didn’t budget for.

This guide breaks down what unvested shares are, how vesting typically works in New Zealand, and what you should think about before you issue equity to your team.

What Are Unvested Shares (And Why Do They Matter For Your Business)?

Unvested shares generally refers to shares that have been issued or transferred to someone (often an employee, contractor, or founder), but are still subject to vesting conditions and restrictions (for example, the company’s or other shareholders’ right to buy them back or require a transfer if the person leaves before vesting).

It’s common for people to use “unvested shares” loosely to describe equity that’s been promised but not yet granted. Strictly speaking, if someone hasn’t actually received shares yet, they usually hold a contractual right or an option/entitlement under a plan rather than shares.

In practice, vesting terms are used to make sure equity is earned over time or upon hitting milestones. Until the person meets those conditions, the shares (or the equity entitlement) are treated as “unvested”.

From a small business perspective, unvested shares matter because they help you:

• Reward long-term commitment (rather than giving away equity upfront).
• Protect your cap table if someone leaves early or performance doesn’t work out.
• Keep incentives aligned as the business grows.
• Reduce the risk of “dead equity” (shares sitting with a former team member who no longer contributes).

Just as importantly, vesting forces you to answer the hard questions early: what happens if an employee resigns, is terminated, goes on extended leave, or becomes a “bad leaver”?

Unvested Shares Vs Options: The Common Confusion

People often mix up unvested shares with share options. They can look similar, but they’re not the same thing.

• Shares: ownership in the company now (even if subject to restrictions, escrow arrangements, or buyback/transfer rights).
• Options: a right to acquire shares later, usually once vested and exercised.

Both approaches can include vesting, but the legal and tax consequences can differ. The “best” structure depends on your goals, who you’re granting equity to, and how your company is set up.

How Vesting Usually Works In NZ Employee Share Schemes

Vesting terms are the rules that turn unvested shares (or unvested entitlements) into vested ownership over time or on milestones.

There’s no one-size-fits-all approach in New Zealand, but most employee share schemes use one (or a mix) of the following vesting methods.

Time-Based Vesting

This is the most common structure: the person vests their equity as they continue working for you.

Example: an employee is granted 10,000 shares that vest monthly over 4 years. Each month, a portion becomes vested (earned). Anything not yet vested remains unvested.

Cliff Vesting

A “cliff” means nothing vests until the person hits a minimum period of service.

Example: 12-month cliff, then the rest vests monthly over the remaining 36 months. If they leave at month 11, they vest nothing.

Cliffs are popular with growing businesses because they reduce the chance you give away equity to someone who leaves quickly.

Milestone Or Performance Vesting

Instead of (or as well as) time, vesting can be linked to:

• revenue targets
• product delivery milestones
• customer growth
• successful capital raises
• specific KPIs

If you’re using milestone vesting, it’s worth being extra careful with drafting. Vague milestones are a recipe for arguments later (for example: what counts as “launch”, “profitability”, or “growth”?)

Vesting On A Sale Or Exit (Acceleration)

Some schemes include “acceleration”, meaning all or part of the unvested portion vests early if there’s a major event like:

• a sale of the business
• a merger
• a major investment round

Acceleration can be attractive for employees, but as the business owner you’ll want to think through how it affects your ability to sell, negotiate, or restructure later.

What Happens To Unvested Shares When Someone Leaves?

This is usually the biggest practical issue for NZ businesses: if an employee leaves, what happens to their unvested shares?

Without clear rules in writing, you can end up with:

• disputes about whether equity should be kept or returned
• a messy cap table that scares off investors
• ex-employees holding equity but no longer contributing
• founders stuck in negotiations with someone who has little incentive to cooperate

Most schemes deal with leavers by using one of these approaches (or a combination):

Automatic Forfeiture (Unvested Portion)

In many schemes, the intention is that any unvested portion is lost when the person stops being eligible (for example, when employment ends).

In practice, this isn’t something you can rely on unless the arrangement is structured and documented so it is legally effective (for example, via a contractual cancellation of an unvested entitlement, or via enforceable transfer/buyback mechanics where shares have already been issued). The right approach depends on whether the person actually holds shares or only a right to receive them later.

Buyback Or Compulsory Transfer

Another common approach is a company buyback or compulsory transfer mechanism. This means if the person leaves, the company (or sometimes existing shareholders) can require a transfer and/or buy back:

• the unvested portion (often at nil or nominal value, depending on how it’s structured), and sometimes
• vested shares too (often at fair market value, or a value based on “good leaver/bad leaver” rules).

In New Zealand, share buybacks and forced transfers need to be handled carefully under the Companies Act 1993 and your company’s constitution (if you have one). For example, company buybacks must generally comply with statutory procedures (including the solvency test and required approvals), and any compulsory transfer provisions need to be properly built into your governing documents and agreements. If you’re setting up the rules, it often makes sense to align them with your Company Constitution so there isn’t a mismatch between your scheme and your governing document.

Good Leaver Vs Bad Leaver Terms

Leaver provisions usually distinguish between:

• Good leaver: e.g. redundancy, illness/injury, mutual agreement, death, sometimes resignation with proper notice.
• Bad leaver: e.g. serious misconduct, breach of duties, fraud, sometimes resignation to join a competitor.

The definition matters, because it can change what happens to the shares and what price (if any) is paid for them.

Be careful here: “bad leaver” provisions can create employee relations issues if they feel punitive or unclear. It’s usually best to keep the rules objective and tied to real risks you’re trying to manage.

Key Legal Documents To Get Right (So Vesting Terms Are Actually Enforceable)

An employee share scheme isn’t just a handshake and a spreadsheet.

To protect your business, you’ll usually need a few documents working together, each doing a different job. The right mix depends on whether you’re issuing shares, options, or another equity-like arrangement.

Shareholders Agreement

If employees will become shareholders (even gradually), you’ll want clear rules about decision-making, transfers, confidentiality, and exits. A properly drafted Shareholders Agreement is often the document that makes vesting terms workable in practice, because it can spell out what happens on exit events, disputes, and share transfers.

Share Vesting Documentation

Vesting can be documented in a few ways, such as:

• a standalone vesting agreement
• an employee equity plan and individual grant letters
• special share terms (for example, different share classes)

The key is clarity: who gets what, when it vests, what conditions apply, and what happens if those conditions aren’t met.

If you’re building a startup-style vesting framework, a dedicated Share Vesting Agreement can help keep the rules consistent across your team.

Employment Contract Alignment

Your share scheme should not contradict the employee’s employment terms. For example, if vesting depends on “continuous employment”, you’ll want your Employment Contract and policies to clearly define things like notice periods, termination grounds, and what happens in different leave scenarios.

Also, be mindful that “equity” can be emotionally charged. If someone believes they were promised ownership, and your paperwork doesn’t line up, you can face disputes that go beyond pure contract interpretation.

Company Resolutions And Company Records

Issuing shares is a corporate governance step, not just a HR decision. You’ll generally need:

• director/shareholder resolutions (depending on the company and constitution)
• proper share registers
• updated cap table records

If you’re issuing shares to new people, you might also need supporting documents around the issue of shares and the rights attached to them.

Common Mistakes NZ Businesses Make With Unvested Shares (And How To Avoid Them)

Equity incentives can be great, but small businesses often run into the same avoidable problems.

1. Promising Equity Before You’ve Finalised The Scheme

It’s tempting to say “we’ll give you shares” during hiring to close a candidate.

The risk is that once expectations are set, it can be hard to walk back terms later. It’s better to say something like: “We’re offering equity under our employee share scheme, with vesting conditions” (and then document it properly).

2. Using Vague Vesting Milestones

“When the product launches” or “when we hit profitability” can be interpreted in multiple ways.

If you want milestone vesting, define:

• what success looks like (objective criteria)
• who decides whether it’s achieved
• what evidence will be used
• what happens if there’s a dispute

3. Not Planning For Leavers Upfront

If you don’t address leavers, you’re effectively letting the default position apply (which may not fit your business at all).

Ask the uncomfortable questions now:

• What happens to unvested shares if the employee resigns?
• What if you terminate employment for cause?
• What if you make the role redundant?
• Do you want to buy back vested shares too, or only unvested?

4. Forgetting About Tax And Reporting Implications

Employee share schemes can have tax consequences for the employee and compliance considerations for the business (including record-keeping and reporting).

This article is general information only and isn’t tax advice. Before implementing a scheme (or offering equity to a specific person), it’s a good idea to speak with your accountant or a tax adviser, and get legal input on the documents so the structure and paperwork match what you’re trying to achieve.

5. Not Thinking About Future Investment Or A Sale

Imagine you’re negotiating with an investor in 18 months. They’ll likely scrutinise your cap table and ask:

• Who owns what?
• What’s vested vs unvested?
• Can you cleanly unwind unvested equity if someone leaves?
• Are there any odd side agreements?

A clean, well-documented scheme can make due diligence smoother. A messy or inconsistent scheme can delay investment (or reduce your negotiating leverage).

Key Takeaways

• Unvested shares typically means shares that have been issued but are still subject to vesting-related restrictions, or (depending on the structure) an unvested right to book future shares under a plan.
• Vesting is usually time-based, cliff-based, milestone-based, or includes acceleration on a sale or major event.
• If someone leaves, you need clear rules for what happens to the unvested portion (and whether vested shares are affected too), otherwise your cap table can become a long-term problem.
• To make vesting enforceable, your equity arrangements should be documented properly and aligned across key documents like a Shareholders Agreement, a Share Vesting Agreement, and the employee’s Employment Contract.
• Common pitfalls include vague milestones, promising equity too early, failing to plan for leavers, and not considering future investment or sale scenarios.
• Because equity incentives can affect ownership, governance, and tax outcomes, it’s worth getting tailored legal advice so the scheme fits your business (not just a generic template).

If you’d like help setting up an employee share scheme, vesting terms, or getting your documents aligned, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.