The private equity buyer is offering our target seven-times multiple, but the deal is conditioned on the founder signing an employment agreement with non-solicitation covenants and a bad-leaver equity forfeiture clause. How do we structure the employment contract so our equity value is not held hostage post-close?

Question

Tyler Smith · Accepted Answer

Buyers frequently use post-closing employment agreements and bad-leaver clauses to shift risk back onto sellers, effectively turning equity consideration into an unearned retention bonus. You must aggressively constrain these definitions in the definitive transaction agreements.

First, narrow the definition of a bad-leaver termination exclusively to intentional felony acts, willful financial fraud, or proven gross negligence that results in material, quantifiable harm to the company. The standard draft from buyer counsel often categorizes termination for cause to include failure to meet subjective performance targets, disagreement with board strategy, or minor policy infractions. Strip those clauses out entirely. If the sponsor terminates you because the business misses budget or because you disagree on strategy, that must be classified as termination without cause.

Second, dictate what happens to your rolled equity upon termination. Under a without-cause termination, your equity must remain completely intact with zero repurchase discount. If the buyer insists on a call option to repurchase your rollover shares upon your departure, the purchase price must be fair market value established by an independent third-party valuation firm, paid entirely in cash within sixty days of exit, with no seller notes or discounted formulas allowed.

Third, establish a clear mutual separation roadmap. Detail your exact seat on the Accountability Chart, limit your working hours after year one, and define the succession milestones required to transition your responsibilities to internal leaders. When the succession criteria are met, your employment agreement should automatically convert into a non-executive board seat, freeing your schedule while insulating your retained equity from operational disputes.