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The case for company-centric Leaver clauses

Frst is a seed-stage VC firm focused on supporting a new generation of French entrepreneurs with global ambitions.

Copyright Hunter Walk

One of the most touchy discussion of any VC Term Sheet negotiation revolves around the so-called “Good and Bad Leaver” clause — and for good reason, as it touches the very core of Founders’ entrepreneurial drive: their ownership. (Also, the name of the clause doesn’t help).

Lots of creativity has been unleashed on this topic, with countless arguments made to justify each and every position with the obvious mix of good, less good, and bad faith — mostly to the great satisfaction of fee-hungry lawyers.

Our own approach is summed up in our open-sourced Term Sheet. We’ve gone to great lengths to make sure our mechanism is straightforward and fair, and above all company-centric.

Let’s see (i) why we have designed it in this particular fashion and (ii) how it works in practice.

Our 3 foundational principles

We have spent a fair amount of time thinking through our standard Good/Bad Leaver clause, with the following three principles at core (actually quite close to the ones detailed by Alexis Robert a few years back):

  1. Company-centricity — the only goal is to make a clean separation between the departing founder and the company, and create conditions to attract new talent as replacement. The goal is not to benefit one or other specific shareholder group (investors or other founders)
  2. Simplicity — to bring an actionable and easily understandable framework to facilitate and speed up the discussions in the event people decide to part ways
  3. Linearity — to avoid any “threshold effects” that create bad incentives

The rationale is the following:

  • As investors focused on the pre-seed/seed phase, we are highly conscious that only Founders can find Product/Market fit; and we expect the alchemy between them to deliver much more than the sum of the parts
  • However, we also know that over time individual motivations, interpersonal relationships and life projects can change and diverge
  • When that happens, you are in a much better position if you have a simple and transparent mechanism that both (i) ensures a speedy transition and (ii) creates favorable conditions to attract new talent as replacement, to allow the company to move on as quickly as possible

Let’s now do a quick walk-through of our standard clause.

Our company-centric approach to the Leaver clause

Our clause

Here is a recall of our clause, taken from our standard Term Sheet:

Founder Vesting Mechanism: 100% of the Shares held by the Founders (the “Vesting Shares”) will be subject to claw back with a reverse vesting over a 48-month period (linear monthly vesting).

Founder Vesting Price: If the Founder’s termination of employment is due to a serious misconduct (“faute lourde”) (“Bad Leaver”) all shares (vested and unvested) will be offered at nominal value to all shareholders, on a pro-rata basis.

If the Founder’s termination of employment is not due to a Bad Leaver event (“Good Leaver”) the unvested shares will be offered at nominal value to all shareholders, on a pro-rata basis. Vested shares will be offered at fair market value to all shareholders, on a pro-rata basis.

Departure for such reasons as death or serious illness of a Founder or his/her spouse or children is considered Good Leaver.

Put simply, any “Good/Bad Leaver” clause is essentially comprised of four parameters:

  • The “Vesting Mechanism”, that sets a period of time over which shares are progressively “vested”, which can be understood as “definitively acquired” by their owner. In a way this also reflects the progressive crystallization of the value creation expected at the time of investment
  • The “Departure Cases”, that list the various reasons for a Founder’s departure and categorizes them into essentially two buckets: “Good Leaver” (= friendly departure) and “Bad Leaver” (= unfriendly departure)
  • The “Vesting Price”, that sets at what price the vested & unvested shares will be bought in the event the clause is triggered (depending on the Departure Cases)
  • The “Buyers”, describing who will be entitled to buy said shares

The next four paragraphs detail our position on each of these parameters.

Vesting Mechanism

We have retained a mechanism that:

  • initially applies to 100% of the shares, because there is really nothing more than Founders when we invest; so 100% of the value we assign to the company relies on what is expected to be built in the future. In this context, it would not make any sense should one of them depart the day after the closing to be allowed to retain a significant share in the company
  • is fully linear over 4 years, without any “cliff” period, to avoid any threshold effect

Departure Cases

In order for this category not to be weaponized, we believe that “Bad Leaver” cases should really be limited to objectively bad behaviour, which is quite close to the legal concept of “Gross Misconduct” (or “Faute Lourde” in France). We are talking harassment, bullying, fighting, embezzlement, fraud, etc. This also includes the voluntary and continued breach of the dispositions of the Shareholders Agreement (notably regarding exclusivity & IP rights).

Every other situation (including simply “quitting” at any point in time) is deemed to be a “Good Leaver”.

Vesting Price

There are actually two vesting prices, depending on the Departure Case:

  • In the event of a “Bad Leaver”, this is pretty simple: the Vesting Price for both vested and unvested shares is equal to the nominal value of the shares (i.e. as legally close to 0 as possible)
  • In the event of a “Good Leaver”, the Vesting Price applied to vested shares is based on the fair market value of the company. In practice, if there has been a 500k€+ round less than 6 months ago we retain this price, otherwise we defer to a third-party expert to propose a fair price. For unvested shares the Vesting Price will remain the nominal value

Note that the purchase of “vested shares” and “unvested shares” are actually two separate topics — Unvested shares can be repurchased regardless of whether both parties find an agreement on the fair market value for the repurchase of the vested shares.

As some of you will note, the frequent practice in the market today is to create several layers of discount (first with the nominal value on unvested shares, and second with another discount on the fair market value on vested shares). We believe that this is much more complex than it needs to be, and, frankly, mostly a monster created by lawyers to justify their fees :).


This is one of the main aspects of our “company-centric” argument: we believe that the purchased shares (primarily the unvested ones) should primarily be bought by the company (or, when not practical/feasible for legal reasons, by all the other shareholders prorata of their ownership).

In our view, this is the only fair way to proceed because this mirrors what will happen on the other end of the transition: indeed, you will also need new shares to incentivize one or several new hires that will come to replace the departing Founder. If that was done through a new ESOP, this would dilute every shareholder proportionally; so if the repurchased shares are used instead it should be done proportionally too.

Learning by doing

Unfortunately but unsurprisingly, over the course of the past few years we have been exposed to several cases where we have had to refer to the Leaver clauses.

Our current iteration draws from this first-hand experience: every time, we have observed that (i) simpler was always incomparably better, and (ii) bringing a more “company-centric” viewpoint was very helpful in allaying the emotions of all the parties involved, bringing more objectivity to the discussion, and ensuring a speedy execution in order to stay focused on the continued success of the company.

We surely hope that this viewpoint becomes more and more common in the future!

Please let us know what you think in the comments.



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