This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Here is the cause-definition story executives almost never hear before signing an offer letter: the broad, company-friendly definition buried in the equity incentive plan is what controls at termination, unless the service agreement says otherwise — and most service agreements do not say otherwise with enough precision to matter. The result is a vested option that looks like the executive’s property right up until it is not. A short clause stating that the bespoke cause definition in the service agreement controls over the plan would have closed the gap. It usually does not get drafted that way because nobody on either side wants to slow down the offer.
This piece is a companion to the parent post on getting equity and IP right in startup contractor and executive agreements, narrowed to a single drafting question: how the term “cause” gets defined across the plan, the award agreement, and the service agreement, and what an executive candidate should actually negotiate.
The plan’s default definition is built for the company
Open any garden-variety equity incentive plan and the cause definition tends to look like a catalog of grounds. Common ingredients include conviction of, or plea of nolo contendere to, a felony or any crime involving moral turpitude or dishonesty; material breach of any agreement with the company; willful misconduct or gross negligence in the performance of duties; material violation of any company policy; embezzlement or misappropriation; and — the catch-all that does most of the work — any other conduct that, in the determination of the board or administrator, is materially injurious to the company. That last clause swings open a door.
Three structural features of a plan-form cause definition disadvantage the holder. First, the determination is usually committed to the sole discretion of the board or plan administrator, with no obligation to consult the executive or to substantiate the conclusion in any way that a court would later second-guess. Second, there is typically no cure period — if the conduct is found, the consequence attaches immediately. Third, the catch-all language is open-ended by design. It exists to give the administrator latitude when something happens that the drafters did not anticipate, and that latitude runs against the holder.
Stock plans are written for the company, by the company’s counsel, on the assumption that the plan will govern hundreds of grants made to hundreds of people over many years. They optimize for administrative flexibility, not for the protections any individual senior hire would want at the negotiating table. That is the right design choice for a plan document. It is the wrong default for a particular executive who has bargained for specific economics.
The bespoke definition narrows what counts as cause
A negotiated cause definition in the service agreement does three things that the plan default does not. It enumerates the grounds with specificity, it imposes process before a cause finding can attach, and it constrains the catch-all.
Enumeration first. Instead of “material breach of any agreement,” a negotiated definition says “material breach of this Agreement or of the Proprietary Information and Inventions Assignment Agreement, which breach is not cured (if curable) within thirty days after written notice from the Company describing the breach in reasonable detail.” Instead of “any conduct materially injurious to the Company,” the bespoke version either deletes the catch-all entirely or pins it to acts of fraud, embezzlement, or willful misconduct undertaken with the intent to harm the company. The vocabulary shift is dramatic. “Willful” carries a real evidentiary burden. “Intent to harm” is harder still. Open-ended judgments of injury are not.
Process next. A well-drafted bespoke clause typically requires that, before termination for cause, the company give written notice describing the asserted ground in reasonable detail; that the executive have an opportunity (often thirty days) to cure if the ground is curable; and, for certain grounds, that the board make the cause finding by a specified majority after the executive has had a chance to be heard. None of this is exotic. All of it raises the procedural floor that an angry board has to clear before terminating for cause and using that label to extinguish the equity.
Then the catch-all. If a residual category is going to survive at all, it should be tightly bounded. Conviction of a felony is a defensible ground — it is objective and verifiable. “Material violation of any company policy” is not — policies can be amended, applied selectively, or invented after the fact. Narrowing the catch-all to a short list of defined-term events (conviction or plea, fraud, embezzlement, willful misconduct causing material harm) is the negotiation that actually moves the risk allocation.
Why the for-cause exit is more punishing than holders realize
The conventional wisdom is that termination for cause cuts off future vesting. That is the part executives expect. The part that surprises them is what happens to the vested portion. Many standard plan and award forms provide that, on a termination for cause, vested but unexercised options expire immediately — not at the end of the usual three-month post-termination exercise window, but on the date of termination itself. The holder does not have time to come up with the exercise price. They do not get the window to consider an AMT-friendly exercise strategy. The option is simply gone.
Pair that with a broad plan-form cause definition, and a single subjective board determination — “materially injurious to the Company” — has the power to vaporize equity the executive has spent years vesting. Whether that is the intended bargain is a business decision. It should be a decision, not a surprise. The parent post on drafting executive equity flags the same dynamic. This piece is the deep dive into how to draft around it.
The good-reason mirror clause
If cause is the company’s exit lever, good reason is the executive’s. A good-reason clause says that the executive may resign on the occurrence of certain events — a material reduction in title, duties, or base compensation; relocation of the principal place of work beyond some threshold; a material breach of the agreement by the company — and that resignation for good reason is treated, for severance and equity purposes, as a termination by the company without cause.
The mirror structure matters. Without a good-reason clause, a company can engineer a quiet exit by demoting the executive, cutting the base, or moving the office, until the executive resigns and forfeits the equity-protective consequences that a without-cause termination would have triggered (severance, acceleration, the longer exercise window). The good-reason clause closes that arbitrage. It comes with its own procedural floor — notice from the executive describing the event, an opportunity for the company to cure, and a deadline by which the executive must actually resign — but the core protection is symmetrical to cause and should be drafted that way.
One detail worth attention. Good reason needs the same kind of catch-all discipline as cause. A broad “any other material adverse change” clause is just as open-ended for the executive as the company’s catch-all is for the board, and aggressive companies will try to delete it. The cleaner trade is a closed list of enumerated triggers with reasonable cure rights, plus an explicit cross-reference to the equity consequence — “termination by Executive for Good Reason shall be treated as a termination by the Company without Cause for all purposes under the Plan and any Award Agreement.”
The interaction with exercise windows and acceleration
A bespoke cause definition does its real work at the intersection of three other provisions: the post-termination exercise window for vested options, any acceleration of unvested equity, and the severance package. Each of those provisions typically conditions its richer treatment on the absence of cause. Narrow the cause definition and you have widened the gate to the better outcome under all three.
The exercise window is the most common pressure point. Plans typically grant three months post-termination for an ordinary departure, twelve months for death or disability, and immediate expiration on a termination for cause. A bespoke definition that requires actual willful misconduct and a board finding, with notice and cure, makes the immediate-expiration outcome much harder to invoke. The realistic baseline becomes the three-month window, which is itself unforgiving but at least gives the holder time to plan an exercise. The companion post on post-termination exercise windows walks through that machinery in detail; the point here is that the cause definition is what governs which window applies in the first place.
Acceleration provisions tend to use the same lever. A double-trigger acceleration clause — equity accelerates if the executive is terminated without cause (or resigns for good reason) within a defined window around a change of control — depends entirely on what “without cause” means. A broad plan-form definition gives the acquirer an opening to terminate for purported cause and avoid the acceleration; a narrow bespoke definition makes that argument much harder to sustain. The dynamics around acceleration in M&A are covered in more depth in the post on single-trigger and double-trigger acceleration. The lesson here is just that the cause definition is upstream of the acceleration economics, and tightening it tightens them.
Express the override — do not assume it
The drafting move that ties this all together is a short clause in the service agreement stating, in substance, that the definitions of “Cause” and “Good Reason” in the service agreement control over any corresponding definitions in the Plan or any Award Agreement for all purposes, including the determination of post-termination exercise windows, forfeiture, and acceleration. Without that override, the parties are left to argue under contract-interpretation principles about which document governs, and the plan generally has the textual advantage because it expressly says so.
Three things to confirm when drafting the override. First, that the plan actually permits a bespoke definition to control — many do, expressly, deferring to a definition in “an individual agreement,” but you only know that by reading the plan. Second, that the award agreement does not contain its own conflicting definition that the override fails to address; if it does, name it and override it too. Third, that the override is paired with consistent definitions everywhere — the service agreement, any side letter, the change-of-control severance plan if there is one. Two different bespoke cause definitions in two different documents are worse than one bespoke definition and one plan default, because at least the latter is unambiguous about which one wins.
The authority the bespoke approach rests on
The federal tax code itself does not define cause — the cause concept is a creature of state corporate and contract law, not the Internal Revenue Code. But the statutory backdrop matters because it constrains what the bespoke definition can do. Incentive stock options under IRC § 422 require that, to retain ISO treatment, the option be exercised within three months after the holder ceases to be an employee (twelve months for death or disability). A bespoke service-agreement provision can extend the contractual exercise window beyond those statutory periods, but doing so converts the ISO to a nonqualified option for the period beyond the statutory window. That is sometimes the right trade — losing ISO treatment in exchange for an actual chance to exercise — but it needs to be a conscious choice. The cause definition is the upstream input; the exercise window and the tax characterization are the downstream consequences.
The drafting checklist, condensed
Putting the moves in one place: First, do not let the plan’s catch-all do the work. Either delete the residual category or pin it to fraud, embezzlement, or willful misconduct with intent to harm. Second, build in notice and cure for any ground that is even arguably curable. Material breach, policy violation, failure to perform — all of these are curable, and the cure period turns a guillotine into a process. Third, require a board finding (by a stated majority, after notice and an opportunity to be heard) for any termination for cause that would extinguish vested equity. Fourth, draft the good-reason clause as a mirror, with the same procedural floor and an explicit cross-reference to the equity consequence. Fifth, write the override clause expressly, name the documents it controls over, and confirm the plan permits the override. Sixth, extend the post-termination exercise window for any termination other than cause as defined in the service agreement — knowing that the extension beyond the statutory ISO period converts the option, and pricing that accordingly. Seventh, list the cause and good-reason definitions in the survival clause so that they outlive the employment relationship.
None of these moves is unusual at the senior-executive level. All of them tend to get skipped at the next layer down — the early VP hire, the first non-founder operator, the technical lead whose offer letter was generated from a template. The compliant-first-hire pattern discussed in the compliant first hire offer letter piece illustrates how much can ride on the cause definition for someone who, ten years later, is the company’s most valuable employee with the largest single grant. The discipline of getting the definition right at the start scales with the value of the grant. It is rarely worth less than it costs to negotiate.
If you are negotiating an executive offer letter with a meaningful equity component, or papering one as company counsel, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
— John
