The Shadow Equity Agreement serves as a strategic tool for companies operating under Hong Kong law to attract and retain key talent while maintaining control over their equity structure. This document is particularly valuable for private companies, startups, and organizations that either cannot or prefer not to issue actual shares. The agreement typically details the number of shadow equity units granted, vesting conditions, valuation methodologies, and trigger events for payments. It provides recipients with economic rights similar to actual shareholders without voting rights or other corporate governance implications. The document ensures compliance with Hong Kong employment, securities, and tax regulations while offering flexibility in structuring incentive arrangements. Companies commonly implement Shadow Equity Agreements when traditional equity compensation might be impractical due to corporate structure, shareholder restrictions, or regulatory considerations.
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1. Parties: Identification of the company and the shadow equity recipient
2. Background: Context of the agreement and relationship between parties
3. Definitions and Interpretation: Key terms including Shadow Equity Units, Trigger Events, Valuation methodology
4. Grant of Shadow Equity: Number of units granted and terms of the grant
5. Vesting: Vesting schedule and conditions for the Shadow Equity Units
6. Valuation: Method for determining the value of Shadow Equity Units
7. Payment Terms: Timing and method of payments upon trigger events
8. Trigger Events: Events triggering payment (e.g., exit, IPO, termination)
9. Restrictions and Limitations: Limitations on transfer, assignment, and encumbrance
10. Confidentiality: Obligations regarding confidential information
11. Termination: Circumstances leading to agreement termination
12. Governing Law and Jurisdiction: Hong Kong law and jurisdiction provisions
1. Non-Competition and Non-Solicitation: Restrictive covenants, used when recipient is an employee or service provider
2. Tax Provisions: Specific tax treatment and obligations, used when special tax considerations apply
3. Change of Control: Special provisions for company ownership changes, used in startups or companies expecting M&A
4. Good/Bad Leaver Provisions: Different treatment based on circumstances of leaving, used for employee arrangements
5. Anti-dilution Protection: Protection against dilution from corporate actions, used in more sophisticated arrangements
6. Dispute Resolution: Alternative dispute resolution procedures, used when parties prefer arbitration or mediation
7. Data Protection: Specific data handling provisions, used when significant personal data is involved
1. Schedule 1 - Shadow Equity Unit Details: Number of units, grant date, and vesting schedule
2. Schedule 2 - Valuation Methodology: Detailed calculation method for Shadow Equity Units
3. Schedule 3 - Trigger Event Procedures: Detailed procedures for different trigger events
4. Schedule 4 - Deed of Adherence: Template for new participants joining the scheme
5. Appendix A - Definitions: Extended definitions and technical terms
6. Appendix B - Notices Template: Standard forms for various notices under the agreement
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