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The examples used here are simplified to help understand the concept. Such structures are complex and it is recommended to seek professional advise.
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You probably tried searching about this within the Malaysia context and have found very little to almost no explanation on how this can be achieved. That’s because the system in Malaysia does not yet support this kind of structure (but there are ways to achieve something similar).
Terminologies that are commonly found in Silicon Valley, US-based startups:
A similar option can be achieved through 2 methods. But, before we go into how to achieve it, we need to understand what is Vested Shares.
Vested shares are shares that you own across the duration of a Vesting period (either gradually or per agreement). It is also common to have a Cliff period (commonly 1 year or per agreed timeline) which means you only start having such shares after a certain period.
Some common answers for better understanding:
You can issue ordinary shares to the founders at the beginning and have a Vesting Agreement that is structured out with the conditions to emulate a vesting period. In a simple example, 1 founder owns 20% shares (assuming its 100 share units out of a total of 500 share units) with the condition of 1 year “cliff period” and 4 years “vesting period”
Quick take away:
Employee Share Option (ESO) is where employees / founders are given Stock Options. This means when an employee exercises their stock option, they can purchase shares at a pre-agreed price (usually lower than market price). In a simple example, 1 founder may hold 100% shares (assuming its a total of 100 share units with a value of RM 1 per share) so it’s worth RM 100 in total.
Quick take away:
This is a subject that can be very complex in nature. The following questions may come to your mind:
As the questions of concern can grow to a long list, it is always best to consult professionals.
A company must start with 100% shareholding and additional Shareholders Agreements, Vesting Agreements, etc can supplement such structures.
In case you’re wondering how much does it all cost ? As a general rule, the more complex it is, the more it may cost. So it is still recommended to go with a standard set up following Malaysia’s structure that is already in place.
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