In a management package, negotiating the number of shares is often simpler than negotiating the leaver clauses. Yet these clauses, usually found in the shareholders' agreement or the plan rules, determine the value of your equity on the day you leave.
A review of the clauses to audit before signing, and the most common pitfalls to identify when negotiating an exit.
The good leaver / bad leaver distinction: the heart of the mechanism
In almost all modern packages, what happens to your equity on departure depends on a binary classification: good leaver or bad leaver. This classification determines the buyback price of the shares, whether unexercised instruments are retained, and sometimes even the executive's ability to continue sharing in future value creation.
Definitions vary considerably from one agreement to another. Some are restrictive, recognizing only death, disability, and retirement as good leaver events. Others, more protective, include unfair dismissal (dismissal without real and serious cause), mutual termination agreements (rupture conventionnelle), and sometimes even resignation after a certain length of service.
The six clauses to audit first
Before signing a management package, these six clauses deserve a careful reading:
- The definition of good leaver and bad leaver: which events trigger each classification?
- The forced buyback formula: how is the buyback price calculated on departure?
- The vesting period and the cliff: when do you actually own the shares?
- Drag-along and tag-along clauses: what happens if the company is sold?
- Treatment on a change of control: acceleration, buyback, or continuation?
- The post-departure exercise window: how long do you have to exercise your instruments after leaving?
Forced buybacks: beware of trap formulas
Most shareholders' agreements provide for a forced buyback mechanism on departure. The formula used makes all the difference.
The most favorable formulas apply a market value, calculated on the basis of a recent valuation (latest funding round, expert report, revenue or EBITDA multiple). The least favorable formulas apply a nominal value or the acquisition price plus a statutory interest rate, which in practice deprives the executive of any value creation.
The difference between a market value buyback formula and a nominal value formula can amount to several hundred thousand euros for a standard CEO package.
Bad leaver events
Certain events are almost universally classified as bad leaver: dismissal for serious or gross misconduct (faute grave or faute lourde), or breach of the non-compete or confidentiality clauses.
Other situations are more ambiguous and require negotiation:
- Dismissal for real and serious cause without misconduct: good or bad leaver depending on the agreement
- Mutual termination agreement: often negotiable, rarely automatic
- Resignation after several years of service: sometimes treated as good leaver
- Departure initiated by the fund or the new shareholder following a change of control
The change of control clause: anticipating the exit
If the company is sold while the holder is still in office, what happens to unvested instruments? Three typical scenarios:
- Full acceleration: all instruments become immediately exercisable, and the holder receives their share of the sale proceeds
- Partial acceleration: only a portion is accelerated, while the remainder continues to vest under the new shareholder
- Continued vesting: the instruments continue to vest and the status quo is maintained
The most protective clause for an executive often provides for partial acceleration on the change of control, and full acceleration if the executive is dismissed within 12 or 24 months following the transaction.
Negotiating your exit: renegotiating unfavorable clauses
If you signed a package with unfavorable clauses, all is not lost at the time of exit. The settlement agreement may provide for more favorable terms or compensation mechanisms (in particular, compensation for loss of opportunity).
The points most often obtained in exit negotiations:
- Treatment of a bad leaver as a de facto good leaver
- Buyback at market value rather than at the punitive value provided for in the shareholders' agreement
- Partial acceleration of unvested instruments
- Extension of the post-departure exercise window
- Early release from the non-compete obligation
Coordination with the termination of the employment contract
The exit package cannot reasonably be negotiated separately from the termination of the employment contract or corporate office. An agreement that deals with these two subjects separately almost always leads to a loss of value.
The most effective approach is to put the entire exit package on the table in a single negotiation: settlement payment, treatment of shares, non-compete clause, and waiver of the notice period. What is conceded on one side can be recovered on the other, and the overall equation is often more favorable than with a multi-step approach.
In any event, best practice is to have your package audited as soon as the initial proposal is made, whenever possible, rather than at the time of departure, when the room for negotiation may be more limited.
