Understanding Good-Leaver and Bad-Leaver Provisions in Equity Compensation

For employees with equity compensation packages, understanding good-leaver and bad-leaver provisions is crucial. These provisions determine what happens to your equity when you leave a company, and the financial implications can be significant. This article explores these provisions in detail and provides practical examples to help you understand their impact.

What Are Good-Leaver/Bad-Leaver Provisions?

Good-leaver and bad-leaver provisions are clauses in equity agreements that specify how an employee's departure from the company affects their equity rights. These provisions create a framework for treating departing employees differently based on the circumstances of their departure.

Good-Leaver Scenarios

A "good leaver" typically refers to an employee who departs under amicable or unfortunate circumstances. Common good-leaver scenarios include:

• Retirement: Example: Sarah, age 65, retires after 15 years at the company. As a good leaver, she retains all vested options and may have an extended exercise window. Her unvested shares might continue vesting on the original schedule.
• Disability or Health Issues: Example: Michael needs to leave his position due to a serious medical condition. The good-leaver provision allows him to keep his vested equity and potentially accelerates the vesting of his unvested shares.
• Redundancy/Position Elimination: Example: Jennifer's department is eliminated during restructuring. As a good leaver, she maintains her vested equity and might receive accelerated vesting of some unvested shares.
• Death: Example: In the unfortunate event of an employee's death, their equity typically passes to their estate with favorable terms, often including accelerated vesting.

Bad-Leaver Scenarios

A "bad leaver" typically refers to an employee who departs under negative circumstances. Common bad-leaver scenarios include:

• Voluntary Resignation Without Notice: Example: Tom abruptly quits without giving the required notice period. As a bad leaver, he might forfeit all unvested equity and face restricted terms for exercising vested options.
• Termination for Cause: Example: Lisa is terminated for violating company policies. The bad-leaver provision results in her forfeiting both vested and unvested equity.
• Breach of Employment Agreement: Example: David starts working for a competitor in violation of his non-compete agreement. He loses all equity rights, including vested shares that haven't been exercised.

Impact on Different Types of Equity

Stock Options

• Good Leaver: Usually retains vested options with standard or extended exercise windows
• Bad Leaver: May lose all options, including vested ones, or face severely shortened exercise windows

Example: Maria, a good leaver, has 90 days to exercise her vested options, while Peter, a bad leaver, must exercise within 30 days or lose them entirely.

Restricted Stock Units (RSUs)

• Good Leaver: Often keeps vested RSUs and might receive pro-rated unvested units
• Bad Leaver: Typically forfeits all unvested RSUs and might lose vested units not yet settled

Example: Rachel, leaving due to retirement, keeps her vested RSUs and receives a pro-rated portion of unvested units. James, terminated for cause, loses all unvested RSUs immediately.

Share Purchase Rights

• Good Leaver: May have the right to keep purchased shares at cost
• Bad Leaver: Might be forced to sell shares back at cost or less

Example: Anna, departing due to disability, can keep her purchased shares, while Chris, leaving to join a competitor, must sell them back at the original purchase price.

Key Considerations for Employees

Review Your Equity Agreement Carefully

• Understand specific good-leaver and bad-leaver definitions
• Note time limits for exercising options
• Check if provisions change based on tenure or position

Notice Period Requirements

• Know how your notice period affects your leaver status
• Understand the implications of garden leave
• Document all communications regarding departure

Financial Planning

• Calculate tax implications of different scenarios
• Plan for exercise costs if leaving
• Consider timing of departure relative to vesting schedules

Negotiation Tips

During Employment

• Request clear definitions of good-leaver/bad-leaver scenarios
• Negotiate for broader good-leaver provisions
• Seek longer exercise windows for vested options

Example: Alex negotiated his employment agreement to include a 12-month exercise window for vested options as a good leaver, instead of the standard 90 days.

During Departure

• Document reasons for departure thoroughly
• Negotiate leaver status if circumstances are ambiguous
• Seek legal counsel for complex situations

Example: Emma's departure involved both personal health issues and a new job opportunity. She successfully negotiated good-leaver status by documenting her health concerns and maintaining professional communication throughout the process.

Protection Strategies

• Keep detailed records of performance reviews and communications
• Maintain professional relationships even when planning to leave
• Consult with financial and legal advisors before making decisions
• Document any promises or agreements about equity treatment

Understanding good-leaver and bad-leaver provisions is essential for protecting your equity compensation. These provisions can significantly impact your financial outcome when leaving a company. Always review your equity agreements carefully, seek professional advice when needed, and maintain clear communication with your employer about departure circumstances. Remember that provisions can vary significantly between companies and jurisdictions. What constitutes a good or bad leaver at one company might be different at another. Always refer to your specific equity agreement and consult with legal and financial advisors for guidance on your particular situation.