Processing good and bad leavers when using Vestd's Articles of Association and options agreement.
The Rules
Treatment of ex-employees is governed by leaver provisions found in your Option Agreements, Articles of Association and/or Shareholders’ Agreements.
Option Agreements set out what happens to options that are not yet exercised.
Articles of Association and/or Shareholders’ Agreements outline what happens to employees’ shares when they leave the company.
These can be edited depending on your requirements, however if you have adopted the standard Vestd Articles — and are using Vestd’s options agreement — the following will apply:
Good Leaver / Bad Leaver
A ‘bad leaver’ is someone who has their employment contract terminated for gross misconduct such as theft, physical violence, gross negligence or serious insubordination; or who breaches a restrictive covenant set out in their contract.
A ‘good leaver’ is someone who leaves the company in good faith or under personal circumstances; this could be for another job, retirement, disability or death.
Options
When designing your options scheme on Vestd, you’ll be able to choose how good and bad leavers’ options are treated:
Keep vested options. If a good leaver, the recipient will keep the number of options already vested, and any remaining options will be cancelled. They’ll be able to exercise their options based on the existing criteria. If a bad leaver, they will lose everything.
Allow vested options to be exercised. If a good leaver, the recipient will keep the number of options already vested, and any remaining options will be cancelled. They’ll then need to exercise these options into shares within 90 days. Any options not exercised within this timeframe will be cancelled. If a bad leaver, they will lose everything.
Lose everything. On leaving, any options not already exercised will be cancelled and the recipient will receive nothing further.
Complete discretion. On leaving, the company decides on one of the choices above but with more flexibility on the amount of options and on the exercise choice. They can choose how long the period will be i.e rather than within 90 days, the company could choose to allow 120 days, etc. If the 'keep options' choice is selected, the flexibility is on how many options they can keep - however, the original exercise condition will continue ("Exercisable" or "exit only").
We go into more detail about changing the conditions of an EMI option agreement with links to HMRC's guidance on acceptable and unacceptable uses of changing the terms.
It's worth knowing that the beneficial EMI tax treatment ends 90 days after an employee leaves, so the employee should be processed as a leaver as soon as possible. And if the options are exercisable upon leaving, they should be exercised within 90 days to retain their tax benefits.
For EMI If the options aren't exercised within 90 days, you should obtain a company valuation at the time of leaving to ensure the correct tax is paid when the options are eventually exercised. You can do this through Vestd by going to your Valuations page, starting a new valuation and selecting Exercise valuation.
For CSOP there is a carve out for certain leaver reasons that allow the tax advantages, even if the options have not been held for 3 years from the grant date. For more information on this, please see what are the 6 exemption clauses for CSOPs?
Shares
Directors may serve notice at any time within 12 months of an employee’s Termination Date, which will require the leaver to transfer some or all of their shares to the company.
A good leaver will receive the greater amount of either the fair market value on the date when the transfer arose, or an amount equal to the total subscription price originally paid when the shares were issued.
A bad leaver will receive the lower amount of either fair market value on the date when the transfer arose, or an amount equal to the total subscription price originally paid when the shares were issued.
If a Transfer Price cannot be agreed upon, the Board must appoint an Expert Valuer (either an auditor or an independent firm of chartered accountants) to certify fair value (if the fair value has been certified by an Expert Valuer within the preceding 12 weeks, this may be used).
This buyback will be subject to the various Companies Act restrictions associated with this. Please read this FAQ as this is a complex process.
How to process leavers on Vestd
Whether for EMI, CSOP or unapproved options, processing good and bad leavers on Vestd is really straightforward. Follow our guide for instructions.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'