Vested interest

How BC law treats it

Property law distinguishes interests that are vested from those that are contingent. An interest is vested when the holder is identified and every condition precedent has been met. It may be vested in possession (the holder can enjoy it now) or vested in interest (the right is fixed but enjoyment is postponed, for example until a life tenant dies). A contingent interest depends on a future event that may never happen, such as reaching age 30. Vested interests are generally transferable and pass to the holder's estate on death. The distinction matters for the rule against perpetuities. Under BC's Perpetuity Act, RSBC 1996, c 358, an interest that has not vested within the perpetuity period is not void at once. The Act applies a wait and see approach, so the interest is valid if it actually vests in time. The Act allows a perpetuity period of up to 80 years. For family trusts used in estate freezes, the Income Tax Act, RSC 1985, c 1 (5th Supp), s. 104(4) deems most trusts to dispose of their capital property every 21 years. Trustees often plan ahead by distributing property to capital beneficiaries, whose interests then vest, before the 21 year date. Whether a beneficiary's interest is vested or discretionary also affects creditor and family law claims. In startups, vesting is contractual. An employee stock option plan or founder share agreement sets a schedule, often four years with a one year cliff. Unvested options can lapse on departure, and unvested founder shares can be repurchased by the company. Once an award vests, it cannot be lost by failing the vesting condition, although exercise deadlines and plan terms still apply.

What it means for your business

Vesting decides who keeps value when plans change. A founder who leaves early with fully vested shares can keep a large stake without contributing further, which deters investors. For family trusts, missing the 21 year planning window can trigger a large tax bill on accrued gains. Business owners should know which interests are already fixed and which can still be adjusted, because that decides what can be renegotiated, transferred or reached by creditors. Example: A Burnaby founder's shares vest monthly over four years with a one year cliff. When she leaves after 18 months, the company repurchases her unvested shares at the original price under the founder agreement, while she keeps the vested portion.

Risks and common mistakes

Using vested interest to mean a personal stake or conflict of interest in a legal document. Assuming a vested interest cannot be transferred without consent, when vested interests are generally transferable unless a contract or the articles restrict them. Issuing founder shares with no vesting or repurchase terms, leaving no remedy if a founder leaves early. Forgetting the 21 year deemed disposition date for a family trust until it is too late to plan. Confusing vesting of an option with the right to exercise it after employment ends.