Leaver clauses are sadly a hugely forgotten part of the term-sheet litterature. You can find a ton of stuff about valuation, preferential liquidation, captable management, … but actionable articles on leaver clauses are strangely rare.
As a result, leaver clauses are sadly one of the most misunderstood clauses by founders.
At Kima Ventures, we’re closing 100 investments per year with a team of 5 people. As such, we are dealing with a SHIT TON of legal documentation, and most of the time the leaver clause was either badly structured, a really important part in the negotiation, or both.
This document has been written in order to help entrepreneurs understand how leaver clauses work and why they are made this way. It has already been used in a few dozen of rounds.
What is a leaver?
When one of your co-founders leaves, you need to protect your company. As such you need to put in place what is called “vesting”.
To put it simple, if you put in place a 48 months vesting, every month each founder unlocks 1/48 of her shares. The “unlocked shares” are called vested shares, the “locked shares” are called unvested shares.
What happens with the vested shares and unvested shares is described in the “good leaver/bad leaver provisions”. It is the mechanics behind how the vesting works.
It basically describes : what they will be entitled to keep + at which value + under which conditions when you leave (if you rage quit, if you quit nicely, etc…).
It’s normal that leavers are a touchy subject
As an entrepreneur, you create a company with your bare hands, you go through a constant storm day after day, you are under constant pressure and stress from everywhere, your personal relationships suffers, it puts insane pressure on your couple, all because you do what you love.
When it comes down to leavers, you’re touching to the core of what you as an entrepreneur has worked so hard to get : your shares. You know it’s mandatory, but you’re scared as shit.
It’s all the more amplified because the subject has been over-mediatized : every entrepreneur has seen The Social Network, every entrepreneur knows what happened with Steve Jobs. On the entrepreneur side, you never know if it can happen to you.
On the other side, I’ve seen a ton of badly structured leavers that are either a threat to the company, or bad for founders (leaving or staying). This is either because founders don’t know how to interpret it, or because they didn’t negotiate them. That’s not right. Entrepreneurs need to know more about this clause.
Correctly structured, correctly explained, and correctly negotiated, there is no way a leaver should be a problem.
The Four Pillars of the Perfect Leaver
1. A leaver should enable people to leave FAIRLY if they aren’t comfortable anymore in the company, and leave nicely.
Something that’s often forgotten, is that companies are moving entities, and people might not feel having a place in the scaled up structure.
Your CTO might prefer small projects where she has more freedom, or your COO likes to do scrappy stuff and doesn’t like the processes that are being put into place, or your co-founder liked doing a million things at the same time and it’s not the case anymore. That’s just part of life, and human nature. You can’t do anything about it.
Be sure that all your co-founders know their leavers by heart. If they begin to feel bad and discover that they’ll be over-penalized if they leave, they’ll start hanging on to their position, and start acting bad on the day to day, which might spread to the whole company. Then when they finally leave, the negotiation will start from a bad position. That’s not something you want, as an entrepreneur and as a VC.
If your co-founder isn’t happy anymore, doesn’t fit in the new structure, wants to leave, and you don’t find a way to make him stay, it’s normal that he leaves, it’s best for everyone involved.
Leavers are not a prison. Leavers are both a way to protect the company’s cap table, and an incentive to stay.
You want them to be penalized if they leave, but fairly, so if they leave fairly, they should still get a chunck of their shares (not all of course) as compensation to have worked hard to build the company up to the present day.
2. A leaver should NEVER be in favor of anyone : not the founders, not the investors.
The leaver should ONLY be pro-company. It’s something sad, it’s only there to protect the company of problems. No-one else.
A sustainable organisation is built upon the fair principle that the value is created by the team as a whole, not by individual stakeholders with their own agenda and interests.
I’ve seen leavers where all the leaver shares goes to investors. Or sometimes they all go to the founders. It creates bad incentives.
3. A leaver should REALLY PENALIZE people that leave by burning everything behind them.
I’m talking about the guy who is angry and wants to delete everything, smash the computer with a baseball bat, or just decides to leave one day without warning and without planning his departure.
They should be the one to leave out with nearly nothing : they didn’t play the game.
4. Vesting should be made by monthly installments, and not quarterly nor yearly.
In a lot of vesting clauses, your shares are unlocked quarterly or yearly. The problem with this situation, is that when an issue arises with a founder, he will try to wait just one quarter or one year before bringing that on the table, because it will unlock them a lot of money.
As an entrepreneur, you want your co-founder to admit there is a problem as quickly as possible. The more you wait for frustrations to come about, the more they develop, and the higher the chances you’ll both end up screwed.
With a monthly vesting, shares are unlocked much more smoothly, and the delta of waiting one month before bringing the subject on the table will be much more negligible.
A Seed / Series A template
You’ll find below a typical leaver that respects the four above points, and that we propose to entrepreneurs in Seed / Series A.
That is of course a rough template that is only meant here as a starting point or as inspiration. No two situations are the same.
In this template, the spirit of the medium leaver is to incentivize the founder to negotiate in good faith instead of just resigning without first discussing.
Of course, the mechanisms are dependent of the governing law.
Just note that during your next round, these terms will be renegotiated, so they just need to be aligned with your current status. You will be able to change afterwards. Furthermore, on a subsequent fundraising round, the leaver is often extended on part of the vested shares in order to align the commitment of founders with the new fundraising horizon.
“But everything is negotiable!”
A ton of people will say : “don’t worry, everything is negotiable! let’s write a harsh leaver, and if someone wants to leave nicely, we’ll negotiate at this moment!”
That’s actually true. In a lot of cases, the situation was nicer than what the agreed upon leaver.
Leavers are not set in stone. They are just here to set a basis for negotiation from the start.
However, as discussed before, every founder will know their leaver. In any case, it’s better to have a fair negotiation point written beforehand in order to defuse possible frustrations as quickly as possible, and to spawn possible negotiations from a friendly beginning.
Everything is going to be fine :)
We know this subject is sensitive, it’s something you don’t really want to talk about.
As you’ve seen; correctly written, the leaver clause is just meant to protect you, and everything is going to be fine :)
At the end of the day, we all know that you’re most likely going to stick together no matter what.
We picked you because we love you ❤️
At Kima Ventures we’re a super business-angel closing 2 investments per week from Seed to Series A. If you have a cool project, or if you just want to chat, just drop a line ;) -> alexis AT kimaventures DOT com
Legal disclosure : I’m not a lawyer, and this should not be construed as legal advice. If you have legal questions, please get advice from your lawyers :)