Usually when companies set up their incentive scheme the employees enters into separate Warrant Holder Agreements, stating the commitments and obligations between the parties in relation to the issued and allotted warrants. One of the crucial provisions set forth in such Warrant Holder Agreement is to manage the situation that occurs when employment is terminated before the exercise period has started, i.e. before the employee may exercise the warrants for shares in the company.
The Good Leaver/Bad Leaver clause – Typically the described situation above may be managed by a Good Leaver/Bad Leaver arrangement. The Good Leaver/Bad Leaver clause proclaims that the price payable for warrants, in the event that the employment is terminated, shall be determined on whether the employee is a Bad Leaver or a Good Leaver. Whereby the price payable for warrants held by a Good Leaver usually is fair market value and for a Bad Leaver usually a reduced lower price.
An employee will typically be considered to be a Bad Leaver if the employment is terminated by the employee or by the company with cause other than age, illness or reduced working ability etc. Hence, the employee will usually be considered to be a Good Leaver if the employment is terminated by the company without the employee being a Bad Leaver. This arrangement gives the employees an incentive to stay for the entire warrant period and gives the employee a fair compensation for the warrants if the employment is terminated on good terms. It may be noted that at similar arrangement may be used towards consultants to the company, however with a different definitions of what a Good Leaver/Bad Leaver is.
Further, contrary to the Good Leaver/Bad Leaver arrangement described above the Warrant Holder Agreement may consist of a Vesting provision, described in a forthcoming blog.
For further information, please contact Ian Slettengren.