What happens to shares when you leave a private company?

What Happens to Your Shares When You Leave a Private Company?

Leaving a private company can be a complex process, especially when it comes to your equity. Unlike publicly traded companies where shares are easily bought and sold on the open market, private company shares are subject to the specific rules and agreements outlined in the company’s shareholder agreement and option grant documents. Understanding these agreements is crucial to knowing what happens to your ownership stake when you depart.

The most significant factor determining the fate of your shares is your classification upon leaving: a “good leaver” or a “bad leaver.” This distinction isn’t about your personal qualities, but rather the circumstances surrounding your departure.

Good Leaver: Generally, a “good leaver” is someone who leaves the company through no fault of their own. This typically includes:

• Resignation for reasons like pursuing another opportunity, retirement, or personal reasons.
• Termination without cause (e.g., layoff, company restructuring).
• Death or disability.

Good leavers usually retain the right to exercise any vested options according to the terms outlined in their option grant. This means they can purchase the underlying shares at the agreed-upon price, even after leaving the company. However, unvested options are typically forfeited. The specific timeframe for exercising vested options after departure varies and is defined in the company’s agreements, so it’s important to review these documents carefully.

Bad Leaver: A “bad leaver” designation usually results from actions detrimental to the company. Examples include:

• Termination for cause (e.g., breach of contract, gross misconduct).
• Resignation in violation of a non-compete agreement.
• Engaging in activities that harm the company’s reputation or financial standing.

The consequences for bad leavers are typically much more severe. They often forfeit all their equity, including both vested and unvested options. This is a crucial distinction and highlights the importance of understanding the company’s definition of a “bad leaver.”

Key Considerations and Next Steps:

• Review your agreements: Thoroughly review your shareholder agreement, option grant, and any other relevant documentation. These documents outline the specific terms and conditions related to your equity, including the definitions of “good leaver” and “bad leaver” and the associated consequences.
• Consult with legal counsel: If you have questions or concerns about your equity, especially if your departure circumstances are complex, consult with an attorney specializing in employment and equity compensation.
• Communicate with the company: Maintain open communication with the company throughout the departure process to ensure a clear understanding of your rights and obligations regarding your shares.

Your departure circumstances significantly impact your equity ownership in a private company. By understanding the difference between a “good leaver” and a “bad leaver” and reviewing your agreements, you can navigate this process more effectively and protect your interests.