Meaning
Contractual provisions in equity incentive plans designate a departing founder or employee whose termination triggers punitive equity forfeiture mechanisms. When an individual departs under a bad leaver classification, unvested equity cancels immediately while vested shares face forced repurchase at nominal value or original purchase price. The bad leaver designation applies strictly to departures involving cause, material breach of fiduciary duty, fraud, or unauthorized resignation before a designated milestone.
The boundary stops where voluntary departure occurs with board approval or where termination occurs without fault, placing those events under alternative contractual definitions.
Contractual Classification
Articles of association and shareholders agreements establish explicit criteria for reclassifying equity holders upon departure. Executive resignations without board consent often convert vested holdings into unvested equity subject to clawback, whereas dismissals for gross misconduct trigger immediate repurchase options. Written notice requirements force corporate secretaries to record the exact statutory grounds for departure within official minute books.
Lacking written grounds recorded at termination, corporate entities risk costly litigation when asserting punitive equity remedies years later.
Repurchase Remedy
The exercise of equity clawback remedies requires strict adherence to corporate law protocols governing share buybacks. Board resolutions must record the exact contractual clause invoked to strip equity, creating an audit trail that survives external legal scrutiny. Share transfers executed under these terms alter the cap table permanently, reallocating forfeited shares back into an option pool or reducing total share count.
Evidentiary Burden
Proving cause requires contemporaneous documentary evidence produced during the period of service. Internal audit reports and recorded communication logs establish the factual basis required to defend equity forfeiture decisions in arbitration. Without documented evidence prepared before termination notice, board determinations face legal overturning and financial restatements.
