Leaver Provisions

Leaver provisions: Nobody wants it but it happens - leaver agreements are necessary to avoid unwanted dead-weight effects

Dominik Konold

Within Employee Stock Option Plans leaver provisions address what happens to an employee’s stock options when they leave the company. These provisions are essential for clarifying the treatment of options upon various departure scenarios. Different types of leaver provisions can be defined in an ESOP. Each provision with its own set of rules and implications. Here are some common leaver provisions.

Good leaver

A good leaver is typically an employee who leaves the company under favorable circumstances. These can be resignation for reasons like retirement, disability, or reaching a certain age. Under the good leaver provisions, employees may retain vested grants or enjoy extended exercise periods to exercise their options. The exercise price remains unchanged, and the employee can exercise the options as if they were still employed.

Bad leaver

A bad leaver is usually an employee who leaves the company under unfavorable circumstances, such as termination for cause or voluntary resignation without meeting specified criteria.

Corresponding provisions often result in less favorable treatment of stock options. Employees may forfeit unvested options or have a limited window to exercise vested options at the current market price.

The exercise price may be adjusted, potentially making it more expensive for bad leavers to exercise their options.

Performance-based vesting

Performance-based vesting ties the vesting of options to the achievement of predetermined performance goals or milestones. Vesting occurs when specific targets are met. Example: A company might grant options to its employees based on achieving a certain revenue target or hitting a particular market share percentage. If the company reaches these goals within a specified timeframe, the options vest; otherwise, they may be forfeited.

Vesting upon leaving

Immediate Vesting: Some ESOPs grant immediate vesting of all or a portion of an employee’s unvested options when they leave the company. This enables departing employees to retain some or all of their unvested options.

Forfeiture: In contrast, many ESOPs contain provisions for the forfeiture of unvested options upon leaving the company, especially in bad leaver scenarios. Employees typically forfeit the unvested portion

Exercise period upon leaving

Extended Exercise Period: In some ESOPs, departing employees, especially good leavers, might receive an extended exercise period to exercise their vested options. This extended period can vary from a few months to several years. Immediate Expiration: Bad leavers could see their vested options expire immediately upon leaving the company, leaving them with no opportunity to exercise.

Change of control

ESOPs can contain specific leaver provisions related to a change of control or acquisition of the company. These provisions might enable employees to exercise their options in full or in part upon such events, ensuring they can benefit from any potential liquidity event.

Death and disability

ESOPs often include provisions that address what happens to an employee’s stock options in the event of the employee’s death or disability. These provisions might allow the employee’s estate or legal heirs to exercise the options.

Transferability

Some ESOPs permit employees to transfer their vested options to heirs, family members, or trusts, while others restrict such transfers.
For more general information about ESOP, please visit our introduction page .
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