Designing Reverse Vesting Terms for Common Holders Facing Series A
Reverse vesting subjects fully issued common shares to investor-mandated repurchase options that unvest equity over a renewed service calendar.
good reason clause
Meaning
A contractual provision that allows an executive to resign for specific detrimental actions by the employer while retaining the right to severance benefits and equity acceleration. The good reason clause typically covers situations such as a unilateral reduction in compensation, a material demotion, or a forced relocation of the primary workplace. This provision protects the executive’s professional status and financial security.
Protective Ground
Board decisions that alter the founder’s role or reduce their authority trigger these protective measures. When the good reason clause is activated, the founder can exit the firm without the financial penalties associated with a voluntary resignation. This mechanism prevents the board from forcing a founder out by making their work environment intolerable.
Financial Remediation
The financial outcomes for an executive resigning under these terms are identical to those of a termination without cause. The company must provide the agreed severance pay, continue health benefits, and accelerate the vesting of outstanding equity. This compensation requires the firm to deploy substantial cash reserves at a time of leadership transition.
Notice Requirement
Executives must follow a strict multi-step process to claim these benefits, beginning with a formal written notice to the board within a specified number of days after the occurrence of the triggering event. The company is then granted a cure period to rectify the situation and restore the executive’s original terms of employment. If the cure period expires without resolution, the executive can resign with full benefits, completing a structured exit that preserves their equity.