Good Leaver Bad Leaver provisions: Stock options after termination

Stock options are often the real reward for many startup employees. But what happens to them if your employment ends? This guide explains what ESOPs and VSOPs are, how “good leaver” and “bad leaver” rules work, what the new 2025 case law means for employees, and how to protect your vested rights when you face termination or sign a severance agreement.

Key takeaways:

• The 2025 Federal Labor Court (BAG) ruling now protects vested options as earned pay. Employers can no longer make them automatically expire after you resign.
• Stock options can be a major part of your compensation. Losing them after termination can mean losing significant value.
• ESOPs and VSOPs define what happens to your shares when you leave – these are governed by “leaver” clauses.
• Check your plan rules carefully before signing any severance or settlement. Clauses like “catch-all” waivers can wipe out your rights.
• Legal advice pays off: Employee stock options are complex and high-stakes – getting help can save you a fortune.

Stock options as motivation and retention tool

Stock options make startup jobs more attractive. The work is exciting, but the salary alone is often modest. That’s why many startups grant company shares as part of compensation. It keeps cash flow stable and aligns the interests of founders, investors, and top talent. If the company goes public or is sold, employees can cash in. If it fails, the shares are usually worthless – but the potential upside can be massive. Employees at companies like Delivery Hero or Zalando have earned millions through such programs. At Personio, a future IPO could make over 100 employees millionaires.

In this article, we explain the basics of ESOPs and VSOPs, what “good” and “bad leaver” rules mean, how courts view them, and how to avoid costly mistakes when your job ends.

ESOPs, VSOPs, and leaver clauses explained

Employee participation schemes such as ESOPs and VSOPs play a key role in attracting and retaining top talent, especially in startups and tech companies. Understanding how these plans work – and how leaver clauses affect them – is essential for both employers and employees to make informed decisions.

ESOP – Employee Stock Option Plan

An ESOP gives employees the right to buy actual shares in their company, usually at a discounted price. The right to purchase shares (often called options) is typically earned over time – or by meeting specific milestones. ESOPs involve real equity, meaning participants become true shareholders once they exercise their options. Sounds like a technicality, but can make a HUGE (!) difference for tax treatment of your compensation (and your role as a shareholder). 

VSOP – Virtual Stock Option Plan

A VSOP works similarly but grants only virtual shares (sometimes called phantom shares). Employees do not own real company stock but receive a payout equivalent to what real shares would have been worth in an exit event. VSOPs are simpler to implement and are now the most common form of employee participation in startups.

Leaver clauses

Leaver clauses decide what happens to your stock options when you leave the company. Whether you’re classified as a “good leaver” or a “bad leaver” determines if you keep or lose your options.

How ESOPs and VSOPs work

An employee stock option plan typically unfolds in three stages:

1. Implementation phase: You are granted a defined number of options when joining or when the plan is introduced. These are subject to certain conditions.
2. Cliff phase: A “cliff” period – often one year – must pass before any options become exercisable.
3. Vesting phase: After the cliff, a portion of your options “vest” (become non-forfeitable) each year. For example, 25% per year over four years until fully vested.

The vesting period (Vesting-Phase) usually lasts three to five years. Plans vary widely: some even make vested shares expire if you resign, while others protect unvested shares unless the employer terminates for cause. It’s essential to read your plan carefully.

How German labor law views ESOPs and VSOPs

ESOP and VSOP plans can be structured flexibly but must comply with German contract law and general terms (“AGB”) rules. Courts tend to review option plans more leniently than standard pay components because options represent a chance to profit rather than guaranteed compensation. Still, they must be clear and transparent.

Key compliance points

• ESOPs/VSOPs must meet transparency requirements, i.e., terms must clearly and unambiguously define when and to what extent beneficiaries have payment rights.
• Leaver clauses can be invalid if they unfairly disadvantage employees, e.g., if a Good Leaver loses all shares or a Bad Leaver loses them for minor breaches.
• ESOPs/VSOPs must also comply with other laws, such as the General Equal Treatment Act (AGG) or the Employment Protection Act (KSchG).

What happens when your job ends?

The big question in ESOP or VSOP plans is often: What happens when an employee leaves the company? This is governed by “Good Leaver” and “Bad Leaver” clauses in ESOPs or VSOPs – but always influenced by case law from the German Federal Labor Court (BAG):

Good Leaver:

A Good Leaver is an employee who leaves the company “on good terms,” i.e., without breaching contractual or legal obligations. Reasons can include ordinary resignation, retirement, or personal circumstances. A Good Leaver usually retains their acquired shares and participates in the sale proceeds (“exit”). Details are set out in the ESOP/VSOP.

Bad Leaver:

A Bad Leaver, in contrast, is an employee who leaves “on bad terms,” for example due to contractual violations, voluntary resignation under negative circumstances, or serious misconduct. Again, the ESOP/VSOP governs the details.

Previous case law: Forfeiture clause on voluntary resignation valid

For a long time, the BAG held that a forfeiture clause on voluntary resignation does not deprive the employee of already-earned compensation but only a “speculative chance.” Beneficiaries could therefore not rely on the value of the options and were considered less deserving of protection.

New case law since 2025: Stock options are compensation for work already performed

In its ruling of March 19, 2025, the BAG fundamentally changed its position on employee equity. The court clarified that already-vested options are not mere speculative chances but part of the compensation for work already performed.

A clause that triggers immediate forfeiture of all vested options upon voluntary resignation unreasonably disadvantages employees (§ 307 BGB) and violates the compensation principle (§ 611a(2) BGB). Such rules effectively hinder resignation, as employees are forced to stay due to potential financial losses.

Devesting clauses that accelerate forfeiture in other termination scenarios (e.g., operational reasons or mutual agreement) were also ruled invalid, as they do not adequately consider already-performed work. The court emphasized the “lock-in effect” of ESOPs/VSOPs in the context of constitutionally protected professional freedom:

A clause that immediately cancels vested options due to termination of employment before an exercise event “also disproportionately restricts the employee’s freedom of occupation protected under Art. 12(1) GG, as it unlawfully makes exercising the right to resign more difficult.”

This ruling significantly strengthens the rights of employees in ESOP and VSOP programs. Voluntary resignation “despite ESOPs” is now easier, as automatically classifying voluntary departures as “Bad Leaver” cases is no longer permissible. Already-vested options remain protected even in the case of voluntary exit.

Tax pitfalls in employee participation

Stock option plans are not just legal minefields – they can create tax traps too. Many employees overlook taxation when negotiating severance packages or exits.

The main risks

• Different taxation rules: ESOPs and VSOPs are taxed differently and can lead to vastly different burdens.
• “Dry income”: Under an ESOP, taxation may occur when the shares are issued – even before you receive any cash. That means you owe income tax without having any money yet.

Since 2021, and especially since 2024, Germany introduced tax deferral rules to reduce this “dry income” problem for startup employees. While this improved ESOPs’ appeal, ESOPs and VSOPs are still treated differently. ESOP profits are usually taxed as capital gains (around 25%), whereas VSOP payouts count as regular income (up to 45%). That’s a big gap.

Always consider the tax impact before agreeing to a termination or settlement. A lawyer or tax expert can often help you save substantial amounts.

How to avoid disadvantages when leaving the company

If your employment ends – whether by termination or mutual agreement – first review your ESOP or VSOP documents carefully. Check what happens to vested and unvested shares in each scenario. If something seems unclear, seek legal advice early.

Pay special attention to “catch-all” clauses (often called general release or Ausgleichsquittung). These are designed to wipe out all mutual claims when signing a severance deal.

Example: A severance agreement may say “All claims between the parties, regardless of their legal basis, are settled by this agreement.”

If your vested options are not explicitly excluded, this clause could cancel them – even if they are already worth millions. Always make sure vested stock options are excluded in writing.

If your options have real value – for example, the company is preparing an IPO – consulting an employment lawyer is essential. Losing vested rights through vague contract language can be a very expensive mistake.

Before signing any settlement, confirm in writing that your vested ESOP/VSOP rights remain intact. Otherwise, they could be lost without compensation.

Frequently asked questions (FAQ)