Reverse Vesting And Holdback – Good News For Entrepreneurs?

"In this world nothing can be said to be certain, except death and taxes." Benjamin Franklin strikes again. However, in the world of high tech and Israeli tax there has been some uncertainty as to whether entrepreneurs, whose shares are subject to a reverse vesting mechanism or a holdback upon their sale, should be paying income or capital gains tax.

Reverse Vesting Most start-ups are founded by several entrepreneurs and the equity is divvied up among them. This is a good thing, it is hard to create a successful venture alone, and the composition of the founding team will be a factor in an investor's investment decision. The risk however is that an entrepreneur will leave the venture prematurely and with his shares. To reduce this risk, and to ensure that all entrepreneurs have skin in the game, we advise both entrepreneurs and early investors that entrepreneurs' equity should be subject to a reverse vesting schedule.

In other words, the entrepreneurs' shares are tied to their continued performance and involvement in the start-up. If they leave within a predefined...