What is a good leaver and bad leaver in ESOPs?

The terms good leaver and bad leaver allow to classify the beneficiaries of an option program leaving the company due to the way these beneficiaries part ways with the company. The former terminates cooperation for reasons not attributable to the company, while the latter terminates cooperation under circumstances identified as undesirable by the company.

Departure of ESOP beneficiaries from the company

An ESOP (English – Employee Stock Option Plan) is an option program designed to increase ties with a company’s key employees and influence their commitment to their job duties by allowing them to become co-owners of the company. This is an interesting and, importantly, effective way to increase employee motivation and loyalty, reduce turnover of specialists and attract talent to the company. Sound appealing? Certainly yes, but in business, as in life, nothing can be certain. It is risky to assume that everything will go according to plan, i.e. the employee will repay the company with diligent work and stay with the company until retirement age. Therefore, the option program most often contains good leaver and bad leaver clauses, i.e. provisions that regulate the scope of the employee’s earned rights depending on the reasons for any cessation of cooperation or termination of the employment relationship. What do you need to know about them?

Good leaver in ESOP

A good leaver is an employee who, for reasons beyond his or her control or deemed not to be his or her fault, ceases to be employed by or terminates employment with the company that provided him or her with participation in the option program. Examples of such a reason would be the emergence of incapacity as a result of accident or illness, and a change in the company’s place of business to one that would make it unduly burdensome for the ESOP beneficiary to perform his or her job duties. What else can be included among the causes that are independent or considered to be not at fault? Among other things, termination of an ESOP beneficiary’s employment or cooperation agreement by the company through no fault of the beneficiary.

As a rule, a good leaver does not lose previously acquired options, even though he is no longer associated with the company. He retains his rights due to the “harmless” from the point of view of the company’s interests cause of termination. The presence of such a provision safeguards the interests of the ESOP beneficiary and is of significant financial importance to him – if for some reason he leaves the company, he is assured that he will retain his rights under the option program under certain conditions.

Bad leaver in option programs

A bad leaver is an ESOP beneficiary who terminates his or her relationship with the company in a manner deemed under the terms of the program to be negative circumstances. The most common of these will include improper behavior that may cause damage to the company, departure to competitors or other actions that may harm the company’s interests.

The consequences of termination depend on the specific option program. Nevertheless, often the ESOP beneficiary loses all options, even those already granted but not exercised. In some cases, the ESOP beneficiary is also required to resell its shares to the company below their market price. Bad leaver clauses are designed to protect the company from losses and increase the likelihood of retaining top professionals in its ranks.

Karolina Krawczyk Of Counsel

karolina.krawczyk@theheart.legal