In the startup world, founders are the backbone of the business. But circumstances change, and founders may depart for all sorts of reasons. When this happens, especially during fundraising, it's crucial to have clear leaver provisions in place to protect the company's equity structure and maintain investor confidence.
Understanding leaver provisions
Leaver provisions define what happens to a founder's shares when they leave the company. They are typically categorised into:
- Good leavers: departures for reasons beyond the founder's control, such as illness, death or redundancy. Good leavers often retain their vested shares or can sell them at fair market value.
- Bad leavers: departures due to misconduct, breach of duties or voluntary resignation within a specified period. Bad leavers usually forfeit their unvested shares and may have their vested shares repurchased at nominal value.
- Voluntary leavers: founders who resign by choice. Depending on the terms, they might retain a portion of their vested shares or be treated similarly to bad leavers.
Clear definitions of these categories in your company's articles of association and shareholders' agreement are essential to avoid disputes and ensure smooth transitions.
Key considerations for founders
- Reverse vesting: a reverse vesting schedule ensures founders earn their shares over time. If a founder leaves early, unvested shares revert to the company, protecting against equity dilution.
- Defining leaver categories: precise definitions prevent ambiguity. Specifying what constitutes "cause" for termination, for example, delineates between good and bad leavers.
- Share repurchase terms: establish clear terms for share repurchase, including valuation methods and timelines, to provide transparency and fairness.
- Board discretion: granting the board discretion to determine leaver status offers flexibility, but it must be balanced with safeguards against misuse.
- Legal compliance: ensure leaver provisions comply with employment laws to avoid unenforceable clauses that could lead to legal challenges.
Why leaver provisions matter during fundraising
Investors scrutinise leaver provisions to assess the stability and resilience of a startup's leadership structure. Well-defined provisions:
- Protect the equity structure: they prevent inactive or departing founders from retaining significant equity stakes, which could deter future investment.
- Provide clarity: they offer a clear roadmap for handling departures, reducing uncertainty for the company and investors alike.
- Demonstrate governance: they reflect a commitment to sound governance, enhancing investor confidence.
How VSQ Legal can help
VSQ Legal offers services including:
- Drafting and reviewing leaver provisions tailored to your goals and legal requirements
- Advising on vesting schedules that incentivise commitment while protecting the company's interests
- Providing strategic counsel during founder transitions to mitigate risk and maintain operational continuity