bad leaver provisions

Contractual Threshold

Triggering events are defined with high specificity to prevent disputes over the nature of a departure. When bad leaver provisions are activated, the board must establish the precise breach of agreement or voluntary exit that justifies the designation. The classification depends entirely on documented performance metrics or legal findings of wrongdoing rather than subjective assessments.

This distinction ensures that the clawback is legally enforceable in the event of litigation.

Financial Consequence

Valuation of the reclaimed shares is heavily discounted to penalize the departing party. Under standard bad leaver provisions, the departing shareholder receives the lower of the current fair market value or the original par value. This substantial financial penalty discourages sudden exits and compensates the firm for the cost of recruiting a replacement.

The acquisition of these shares is usually structured as a company buyback or an option for existing founders to purchase the holdings proportionally.

Equity Recovery

Redistribution of the recovered equity allows the enterprise to restore its capitalization table or allocate options to incoming talent. If bad leaver provisions are not enforced, the organization faces capitalization pressure and potential resistance from future funding sources. The recovered equity often returns to the unallocated option pool or is cancelled to increase the concentration of the remaining stakeholders.

Implementing this recovery process maintains long-term alignment across the cap table.