What happens to an employee’s shares or options when they leave the company?

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 how many options the recipient gets and the exercise timescale. This is not preferable from an HMRC perspective as material changes can be deemed by HMRC to create a new commercial agreement.

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, 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.  

 

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