Founder vesting provisions are a common feature in Austrian VC documents. Leaver provisions are typically implemented in the (non-public) shareholders’ agreement.
As is the case in the UK, Germany and other jurisdictions, founders usually receive their shares upon foundation of the company for an issue price equal to their nominal value. Since the Founder(s) already hold all their shares at foundation of the company, the leaver provisions, if triggered, may cause them to lose some or all of those shares, which is generally dictated by a vesting schedule. Such form of vesting is also referred to as ‘reverse vesting’.
Leaver provisions are generally structured in Austria by way of the founder(s) granting an exclusive and irrevocable right (call option) to the other shareholders of the company, on a pro rata basis, to purchase a certain number of shares (depending on the leaver event) if a leaver event occurs during the vesting period (‘Special Purchase Right’).
Typical vesting schedule
Usually, vesting takes place for a vesting period of four years, in quarterly or monthly instalments, often combined with a vesting cliff of six to twelve months.
Qualification of leaver
As in the UK, vesting provisions in Austria generally distinguish between good and bad leavers. However, recently, a further definition of grey/intermediate leaver has become popular to accommodate the various interest of the parties.
- Founder(s) are generally considered to be a ‘good leaver’ if such founder ceases to be employed or engaged or appointed as managing director without good cause, including occupational disability. An ‘occupational disability’ may be a physical or mental condition that prevents a founder from performing the essential duties of their job. This can be caused by an injury or illness that occurs on the job, a pre-existing condition that is made worse by the demands of the job or an injury or illness that has been developed outside of the demands of the job but prevents the founder from performing the essential duties of his job.
- Founder(s) are generally considered to be a ‘bad leaver’ if such founder ceases to be employed or engaged or appointed as managing director with good cause.
- Founder(s) are generally considered to be a ‘grey/intermediate leaver’ if such founder leaves the company without reason. For example, the founder decides from one day to the next that he does not want to continue. However, there must not be any reason present that would entitle the company to terminate or dismiss the founder for ‘good cause’.
In Austria, ‘good cause’ usually means the legal definition of ‘good cause’ in the Employment Act (Angestelltengesetz). The Employee Act differs between reasons that are qualified as ‘good cause’ from an employer’s and an employee’s perspective.
The reasons outlined in the legal definition materially relate to each party’s main obligations under an employment relationship. This may include, for example, when the employer unduly reduces or withholds the remuneration due to the employee or if the employee, without a lawful impediment, fails or persistently refuses to perform his/her services for a period of time which is relatively long considering the circumstances.
The legal definition of ‘good cause’ is also sometimes supplemented by the following reasons: (i) conviction of or indictment for any crime constituting a felony or that has, or could have, an adverse impact on the performance of the founder’s duties to the company, (ii) material breach of the shareholders’ agreement, (iii) material violation of company policies, this is only in case of gross negligence or willful misconduct.
In general, depending on the bargaining powers, the definitions of ‘good leaver’, ‘bad leaver’, ‘grey/intermediate leaver’ and ‘good cause’ are sometimes (heavily) negotiated. To avoid disputes, these definitions should be precisely defined and thought through.
Treatment of leaver
Depending on the triggering event, different rules apply:
- If a bad leaver event occurs during the vesting period, 100% of the bad leaver’s shares are subject to the Special Purchase Right.
- If a good leaver event occurs during the vesting period, 100% of any unvested shares of the good leaver at that time are subject to the Special Purchase Right.
- If a grey/intermediate leaver event occurs during the vesting period, 100% of any unvested shares and 50% of vested shares of the grey/intermediate leaver at that time are subject to the Special Purchase Right.
- In the event that any leaver event occurs during the vesting cliff, 100% of the leaver’s shares are subject to the Special Purchase Right (see also section below on Vesting Cliffs).
Six to twelve-month cliff periods are common in Austria, where no shares vest in the first six to twelve months but at the end of such cliff period the whole six to twelve months vest and for the rest of the vesting period the general monthly or quarterly vesting is continued. In the event that during such period the founder(s) leave the company, 100% of the leaver’s shares (irrespective of the qualification of the leaver) are subject to the Special Purchase Right.
Founder(s) have often already been working for their company for some time and often at a salary below the market standard. In such cases, it is particularly hard for the founder(s) if all their shares are subject to vesting provisions. The same is true if vesting was agreed upon in the first financing round. In most financing rounds, an existing vesting schedule is simply restarted. This is disadvantageous for founders who have been working for the company for a long time and must earn their shares from scratch each time the company raises additional funding. Hence, vesting schedules are always negotiated in every financing round.
Depending on the negotiating position of the founder(s), one often sees various arrangements concerning the restart of the vesting schedule. For example, a certain percentage of the shares are excluded from the vesting provisions, because they have already been earned and should not be put at risk. Another variant is that a percentage of the shares are considered to be earned and in principle not endangered, but only in case of a bad leaver do the shares become subject to the Special Purchase Right.
Use of leaver shares
In Austria, founders hold common (ordinary) shares. Those shares are subject to the Special Purchase Right (as defined above). It is only in the leaver scenario that it is determined how many shares the founder can keep or must give up.
In many cases, those shares are used exclusively to incentivise future key employees or contractors of the company. However, the shareholders’ majority can decide not to use such shares to incentivise future employees of the company. The definition of ‘the majority’ is again part of negotiation but it usually means the investor majority.
Purchase price for leaver shares
Usually, the purchase price for the leaver shares corresponds to the nominal value of such leaver shares.
Acceleration often applies. Recently, we often see double-trigger acceleration, with the first trigger being the exit transaction and the second trigger being that the founder remains with the company for a certain period after the exit.