Good leaver, bad leaver - what to do when someone has equity?
Share schemes are a fantastic way of incentivising people, but what happens when somebody leaves the business?
Figuring out how you want to treat leavers is a foundational step in designing a share scheme, given that some people will inevitably move on before an exit. Don’t give anybody equity before thinking this through.
There are typically two alternatives that most companies consider, and a number of additional clauses that can be put in place.
The first is any options they have will automatically lapse, unless the Board says otherwise, in which case they can apply whatever conditions they want.
For example, they could allow the options to be exercised, or kept as options going forward, or conditional on different criteria.
Basically this gives the Board discretion to do whatever seems sensible in this scenario at the time. This is the default position with Vestd’s standard agreements.
Good times for good leavers
The main alternative to this is to allow the recipient to keep any options that have vested, so long as they are a good leaver.
A ‘good’ leaver can be defined as someone who has not left the company as a result of gross misconduct or breach of contract.
This can also be achieved within the standard Vestd agreement, as the contract allows for an exception for Board discretion to be included within the schedule.
Bad news for bad leavers
Certain clauses can be put in place for bad leavers that greatly restrict - or entirely prevent - the ability for someone to walk away with a slice of the action.
An example of a case when this may be of use is for shares that are bought back at nominal value as part of a bad leaver clause.
If the option holder has already exercised their options, then they are a shareholder, so if you want to buy back their shares, you will need to have made separate provision for this within the articles of association of the business, or within a Shareholders Agreement that they must sign on exercising the options.
Share buybacks are quite a constrained activity, so please read this article if this may be of interest.
The Vestd platform allows you to buy back, cancel and transfer shares at the touch of a button.
The UK vs the US
In the US it is typical for employee vesting to happen on a monthly or quarterly basis, and recipients tend to be able to walk away with the shares based on the time they’ve put in.
In the UK a lot of schemes vest over a 3-5 year period, and it is often the case that people walk away with nothing if they leave prior to that. It doesn’t have to be that way of course… the terms are entirely up to you.
We are big believers in designing share schemes that are fair, and which reward recipients in small, regular chunks. That is a much better way of incentivising people, as the alternative can be somewhat distant and intangible.
You’re able to include plenty of restrictions on leaving, to impact what people walk away with. But before you do, consider how this will play out in the mind of the recipient.
The whole point of sharing equity is to motivate people, and to reward them in line with what they bring to the party. You want people to feel empowered and encouraged, rather than locked in.
It is really important for the terms and conditions of any equity-based agreement to be fair and balanced, for both employer and employee. To that end, it is worth thinking twice before putting in too many draconian measures for leavers.
Ultimately you need to protect the business and existing shareholders, as well as the recipient. It’s about finding the right balance, while motivating people to join and stick around.
Design a share scheme and share scheme agreements that benefit recipients and protect your business. Book a free consultation with an equity specialist and get started.