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 circ*mstances; 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 to keep. However, the exercise terms ("Exercisable" or "exit only") cannot change, unless the original agreement anticipates such a change (e.g. a modification clause that gives the board discretion to change the exercise terms).
We go into more detail about changing the conditions of an EMI option agreement with links to HMRC's guidance on acceptable and unacceptable uses of changing the terms.
It's worth knowing that the beneficial EMI tax treatment ends 90 days after an employee leaves, so the employee should be processed as a leaver as soon as possible. And if the options are exercisable upon leaving, they should be exercised within 90 days to retain their tax benefits.
If the options aren't exercised within 90 days, you should obtain a company valuation at the time of leaving to ensure the correct tax is paid when the options are eventually exercised. You can do this through Vestd by going to your Valuations page, starting a new valuation and selecting Exercise valuation.
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 upon, 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.
How to process leavers on Vestd
Whether for EMI or unapproved options, processing good and bad leavers on Vestd is really straightforward. Follow our guide for instructions.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'
Handling good and bad leavers within a company involves a comprehensive understanding of legal frameworks, contractual agreements, and tax implications. I've got a solid grasp of the concepts mentioned in the article and can delve into each area:
Articles of Association, Option Agreements, and Shareholders’ Agreements
These documents establish the rules and guidelines for handling employees' departure, including the treatment of shares and options upon leaving the company. They can be tailored to the specific needs of the business, but using Vestd's standard Articles will often dictate the default procedures.
Good Leaver / Bad Leaver Distinction
Understanding who qualifies as a good or bad leaver is crucial. Bad leavers typically involve cases of gross misconduct or breaches of contractual terms, while good leavers exit the company under more amicable circ*mstances such as personal reasons, retirement, or another job opportunity.
Treatment of Options for Good and Bad Leavers
Vestd provides options for managing vested options for good and bad leavers. Options can either be retained, exercised within a specific timeframe, or lost completely based on the circ*mstances of leaving.
EMI Option Agreement Changes and Tax Implications
The EMI (Enterprise Management Incentive) option agreement alterations need careful consideration, especially regarding HMRC's acceptable modifications to exercise terms. Additionally, being aware that the EMI tax benefits end 90 days after an employee leaves necessitates prompt action in processing them as a leaver and potentially exercising their options within that timeframe to retain tax benefits.
Valuations and Exercise of Options
Failure to exercise options within 90 days requires a company valuation at the time of leaving to ensure accurate tax payments when the options are eventually exercised. Vestd provides a process for obtaining valuations and exercising options post-employment.
Shares and Buyback
Directors can issue notices within 12 months post-termination to have leavers transfer their shares back to the company. The valuation for buying back shares differs for good and bad leavers, determined by either fair market value or the subscription price paid originally for the shares.
Processing Leavers on Vestd
Vestd offers a user-friendly method to handle leavers, providing guidance for both EMI and unapproved options.
Navigating these intricacies requires a careful understanding of legal, financial, and HR perspectives, ensuring compliance with regulatory requirements while safeguarding the company's interests and the departing employee's rights.
