Vesting Schedules Written for the Co Founder Who Leaves Early
Structure reverse vesting with nominal price repurchase rights and thirty day section 83b election deadlines to secure equity during early co-founder exits.
Bad Leaver
Meaning
Contractual classification for a departing employee designates specific conditions under which equity rights are forfeited or severely limited upon the termination of their relationship with the business. A bad leaver event occurs when an individual exits under circumstances involving misconduct, breach of agreement or competitive actions against the employer. The definitions in the shareholders agreement or incentive plan dictate whether the company has the right to reclaim shares at a steep discount.
This status governs the economic settlement at the moment of exit and prevents individuals from profiting after damaging the firm. It is usually distinguished from natural exits or medical necessity by the intentional nature of the harmful acts.
Forfeiture Consequence
Loss of value is the primary lever used by corporations to enforce loyalty and protect the existing cap table from hostile former owners. Once someone is labelled a bad leaver within the legal framework, they typically lose the right to keep their unvested shares entirely. More aggressively, the terms may state that the company can repurchase even the fully vested equity at the lower of its initial cost or its current fair market value.
This mechanism stops the departing party from carrying a significant ownership stake into a future where they no longer contribute. It shifts the potential upside back to the remaining team members who continue to build the project. The board uses these clauses to discourage staff from leaving to start rival firms or joining direct competitors immediately after departure.
Legal Definition
Signed agreements list the precise activities that trigger this severe economic penalty to avoid ambiguity during disputes. Typical bad leaver scenarios include termination for cause, criminal conviction, unauthorized disclosure of intellectual property or the solicitation of firm clients for personal gain. If a founder leaves without reasonable notice or in direct violation of a long term lock in clause, the remaining board might apply this label.
Because the consequences are so harsh, the wording is often negotiated heavily during initial funding rounds. Some documents allow for a cure period where the individual can correct a minor breach before the status becomes final. The distinction between simple resignation and an exit that fits the bad leaver mold is the core of most post termination legal battles.
Repurchase Mechanic
Executing the buyback requires a formal notice period and a valuation of the units held by the individual. The business sends a written offer that cites the bad leaver clause to clarify that the penalty price is being utilized. Settlement often happens through a cash payment or the cancellation of outstanding loan notes tied to the initial stock purchase.
If the agreement specifies that the price is par value, the leaver might receive almost nothing for years of ownership. This leverage ensures that the capital remains concentrated in the hands of active operators and aligned investors. Agreements frequently grant the company a limited window of sixty or ninety days to exercise this option before the rights expire.
This ensures that the equity does not stay in limbo while the company seeks to fill the gap left by the departing person.