In the SynchBlog from August 27th, we have already described the Good Leaver/Bad Leaver arrangement, used in order to manage the situation that occurs when employment is terminated before the exercise period has started in a company’s established incentive scheme for employees. As mentioned in that blog Vesting is another arrangement used to manage these kinds of situations.
Vesting clause – The Vesting clause states that the number of warrants that each employee shall be entitled to exercise shall increase over time. Thus, if the employment is terminated, the employee shall on the date of cessation of the employment be deemed to offer a certain amount of warrants for sale to the company (usually for a fair market value). The number of warrants offered for sale depends on the number of years and/or months from the entering into the Warrant Agreement of such event. The company shall in such event have the right to purchase, for example, a 100 percent (of all warrants held by the employee) during year 1 which then will decrease with a certain percentage per month. This is often exemplified in a vesting chart attached to the Warrant Holder Agreement.
The Vesting structure may be more lucrative for the employee since the employee will be compensated and entitled to, at least for a percentage, exercise the warrants, notwithstanding the reason for the termination of the employment.
It may be noted that it is possible to combine the Good Leaver/Bad Leaver and Vesting provisions, thus regulate the number of warrants the company are entitled to reclaim (Vesting period) and to what price (Good Leaver of Bad Leaver).
For further information, please contact Ian Slettengren.