Spotlight On: Issuing Shares for Services and Reverse Vesting


Paying for services in shares can help a company conserve cash resources.
“Reverse vesting” can help set your company up for success from the start.


“You don’t need money, don’t take fame / Don’t need no credit card to ride this train!”  Back to the Future fans may recognize these lyrics from soundtrack hit The Power of Love, but under the power of corporate law, you also “don’t need money” to issue shares for past services.

Issuing shares for past services performed for the corporation can help conserve a company’s cash resources, while also helping your workers feel invested in the company’s success as shareholders.

“Reverse vesting” is a related concept that can be especially useful to apply the shares-for-services concept up front, particularly for newly incorporated companies.

Begin with Tax Advice

Because impressions – and misconceptions – of share entitlement can be easy to create (see SkyLaw’s blog about Forgotten Shareholders), you should be certain that there are no insurmountable tax (or legal) hurdles to your proposed issuances of shares or other securities (like options or warrants) before discussing them with potential recipients.

If you’re the proposed shareholder, or are considering accepting shares as full or partial payment for work performed, you should also get tax advice to understand any consequences of doing so (for example, whether such equity might constitute “income” or a “taxable benefit” on which you must pay tax).

Check the Corporate Law Statute

Corporate law places specific requirements on a company’s board of directors before issuing shares for services.  These requirements help ensure that a company receives fair value for the securities it issues.  For instance, section 23(4) of the Business Corporations Act (Ontario) provides:

Value determined by directors

(4) The directors shall, in connection with the issue of any share not issued for money, determine,

(a) the amount of money the corporation would have received if the share had been issued for money; and

(b) either,

(i) the fair value of the property or past service in consideration of which the share is issued, or

(ii) that such property or past service has a fair value that is not less than the amount of money referred to in clause (a).

The board must therefore determine the fair value of the shares in cash, confirm the fair value of services actually received by the corporation, and compare the two values to ensure that the cash value of the shares is at least covered by the fair value of the services.

A board will often refer to the relevant invoices in making these determinations, but should also confirm the actual services received by the company (rather than relying on what an invoice says was done).  It may also be helpful to have a sense of the market value of the services, to evaluate whether the pricing used by the service provider is fair.

Check Securities Regulations

Each time securities are issued, there must be a prospectus or a prospectus exemption relied upon by the issuing corporation.  Under securities laws, only certain persons can acquire private company shares without the company issuing a prospectus.  Fortunately, section 2.24 of National Instrument 45-106 – Prospectus Exemptions (“NI 45-106”) provides for the issuance of shares to any director, executive officer, employee, or “consultant” of the company.

Usually it’s pretty clear who your directors, officers, and employees are, but there are specific requirements to qualify as a “consultant”.  A “consultant” is a person other than an employee, executive officer, or director of a corporation, that:

  • is engaged to provide services to the issuer or a related entity of the issuer, other than services provided in relation to a distribution,
  • provides the services under a written contract with the issuer or a related entity of the issuer, and
  • spends or will spend a significant amount of time and attention on the affairs and business of the issuer or a related entity of the issuer.

The requirement for a “written contract” to be in place is critical to the definition.  Verbal contracts, estimates, one-way proposals, and unsigned agreements are not a sufficient basis to issue shares under this exemption.

Public companies issuing shares for services will have to comply with additional stock exchange rules.  For example, the Canadian Securities Exchange recently implemented a policy change requiring a four-month hold period to be applied on securities issued under section 2.24 of NI 45-106.

Document it!

Any issuance of securities must be approved by a company’s board of directors and documented by in a written resolution signed by each of the directors or in minutes of a board meeting.

It helps to have a plan in place from the get-go: the service contract should explicitly state the payment that is to be provided in shares, the number of shares to be issued, the value set on each share, and any issuance timeline and other considerations.  Advance planning for payment in shares helps avoid questions later on about when to assess the fair value of the shares being issued, unanticipated tax considerations, and other important details.

When shares are ready to be issued, the service provider must complete a subscription agreement in order to actually subscribe for the shares and confirm the prospectus exemption that will apply to the issuance, among other things.  Consider whether there are any other documents the subscriber should execute, for example a unanimous shareholders’ agreement or a voting trust agreement.

What about Future Services?

While a corporation can agree to pay for services in shares in advance, it can only issue shares retrospectively – once services of at least an equal value have been performed.

If it’s important that shares be issued now, a few solutions are available.  Some common options include:

Issue the shares immediately for cash, and use the cash proceeds to pay for the services going forward

This leaves a clear record of value received by the corporation for legal and accounting purposes, and can be a good look on your cap table for future investors (who will see a company that can attract cash investment).  There is no need for the board to assess the fair value of the services or ensure that they were actually received by the company.  The service provider also becomes a shareholder from day one, potentially offering benefits to both parties over the course of the working relationship as a result.

If the share price appreciates over the course of the contract, the service provider will have locked in the earlier (lower) price for themselves.  And if the working relationship is terminated earlier than planned, there is no confusion about what the fair value of the partial services provided actually is, and how many shares will ultimately be issued as a result.

Reverse Vesting

If yours is a newly formed corporation, “reverse vesting” can be a great solution to get shares into the hands of your co-founders and other strategic partners from the start, while retaining the ability to reduce or eliminate their shareholdings if your expectations are not met over time.

Reverse Vesting

“Reverse vesting” is essentially a purchase option granted to a corporation at the time it issues shares, which permits the company to repurchase those shares upon the occurrence of certain events.  Often, the repurchase price is the same original purchase price paid by the subscriber.  This works particularly well where the corporation is newly formed and its shares have nominal value.

In a reverse vesting scenario, a subscriber purchases all of her shares up front for cash (if the shares have nominal value, this could amount to mere pennies).  At the same time, the subscriber enters into an agreement providing for the corporation’s option to repurchase those shares, except where certain expectations are met.  The expectations for the shareholder to meet should be clear and unequivocal – for example, continuing to be an employee of the corporation as at a certain future date.

If the shareholder fails to meet the expectations, the corporation’s purchase option is activated, entitling the corporation to repurchase all or part of the shares held by that shareholder at that time for the original purchase price (even if the shares have since appreciated in value).  Repurchased shares are usually cancelled.

Reverse vesting can be a great strategy to set your service providers up for success from the start by granting them their full stake in a new company, while retaining the ability to buy them out if the promised services are not ultimately provided.

Options and Warrants

Instead of shares, you may want to issue either options or warrants as consideration for services your business has received. Both options and warrants are rights to acquire securities in the future for a cash payment. Therefore, they can be issued at the outset, at the time you enter into the agreement.  They can also have vesting conditions built in, so that certain expectations must be met before they can be exercised to acquire shares.

The main difference between issuing shares subject to reverse vesting, versus granting an option or a warrant, is that reverse vesting permits a person to acquire their full equity stake on day one, potentially helping them feel more invested over the full course of the working relationship.

Options and warrants carry their own legal requirements and tax considerations, though, and conditions such as a securities law prospectus exemption and board approval must still be satisfied.  See this SkyLaw blog post for some considerations to keep in mind when your business is granting options.

Some corporations put in place an option plan, which can help filter potential recipients of options to meet the requirements of Section 2.24 of NI 45-106.

Key Takeaways

  • Get tax advice
  • Check the corporate law requirements to issue shares
  • Check securities regulation for a prospectus exemption
  • Confirm services have actually been received by the corporation and assess their fair value
  • Get board approval, including the board’s determination of the fair value of shares, and document it
  • Have a clear subscription agreement with your subscriber, and make sure he or she also signs onto the right agreements, such as a unanimous shareholders’ agreement.

A thoughtful and well-advised approach to issuing shares and other securities can help make sure you never need to wish you can travel back in time.