Bad Leaver

The term “bad leaver” is used in the context of startup companies and participation agreements to describe scenarios in which a founder, employee or investor leaves the company under unfavorable or unacceptable conditions. Classification as a bad leaver usually has a negative impact on the treatment of company shares, options or other forms of remuneration when a person leaves.

Definition and concept:

A bad leaver is typically someone who leaves the company for reasons that are considered detrimental or harmful to the company. The exact definition may vary depending on the agreement, but often includes the following scenarios:

1. termination by the company for good cause (e.g. misconduct, gross breach of duty)
2. breach of contract or breach of material obligations
3. Voluntary termination without good cause before expiry of a fixed period
4. Switching to a competitor company in breach of competition clauses
5. Criminal acts or serious misconduct

Importance for startups and investors:

For startups:
– Protection against premature departure of key personnel
– Deterrence of harmful behavior
– Possibility to repurchase shares at favorable conditions

For investors:
– Protection of the investment by sanctioning undesirable behavior
– Ensuring the stability of the company’s value
– Instrument for enforcing loyalty and commitment

Typical arrangements for bad leavers:

1. mandatory sale of all units (vested and unvested)
2. repurchase of shares at a low price (often nominal value or acquisition cost)
3. expiry of all unexercised options
4. loss of entitlements to future payments or bonuses
5. in extreme cases: Obligation to repay remuneration already received

Comparison with “Good Leaver”:

In contrast to bad leavers is the term “good leaver”, which describes scenarios in which someone leaves the company under acceptable or understandable circumstances. Good leavers generally experience significantly more favorable treatment of their shares or options.

Negotiating points:

1. precise definition of bad leaver scenarios
2. Gradation of consequences depending on the severity of the misconduct
3. Process for determining bad leaver status
4. Valuation methods for the repurchase of shares
5. Timeframe for the implementation of bad leaver provisions

Legal and practical aspects:

– Careful wording in articles of association, shareholding programs and employment contracts
– Consideration of labor law restrictions and possible contestability
– Compliance with proportionality and fairness to avoid legal risks
– Consistency with other company guidelines and legal requirements

Strategic considerations for start-ups:

1. balance between deterrence and fairness
2. adaptation of bad leaver provisions to different company phases and employee levels
3. consideration of the impact on corporate culture and employee relations
4. regular review and updating of the regulations

Best Practices:

1. clear and transparent communication of the bad leaver provisions
2. fair and consistent application of the regulations
3. establishment of an impartial process for determining bad leaver status
4. involvement of experienced legal advisors in the design and implementation

Challenges and risks:

1. potential legal challenges and labor disputes
2. negative effects on the company’s reputation if used incorrectly
3. possible demotivation of employees due to excessively strict regulations
4. difficulties in providing evidence in borderline cases

Market trends and developments:

1. increasing differentiation and gradation of bad leaver scenarios
2. increased consideration of compliance aspects in bad leaver definitions
3. adaptation to new working models and international corporate structures
4. tendency towards more balanced and less punitive approaches in some startup ecosystems

Conclusion:

Bad leaver provisions are an important but often controversial instrument in the startup ecosystem. They serve to protect the company and investors from harmful behavior and the premature departure of key personnel. At the same time, they carry the risk of having a negative impact on corporate culture and employee motivation if they are overly strict or applied.

It is crucial for start-ups to design bad leaver regulations carefully and in a balanced way. On the one hand, they should offer effective protection, but on the other hand they should also be fair and proportionate. An overly aggressive interpretation can lead to legal risks and reputational damage, while an overly lax approach can jeopardize the protection of the company.

Investors and founders should view bad leaver provisions as a necessary but sensitive instrument. Carefully weighing up the interests of protection and fairness as well as regularly reviewing and adapting these regulations are crucial for their effectiveness and acceptance.

In a constantly evolving startup environment, bad leaver clauses remain an important topic. The challenge is to draft and apply them in a way that protects effectively without undermining the positive aspects of the startup culture and dynamics. A balanced and thoughtful approach can help to maintain a fair balance between the interests of the company and investors as well as those of the employees.