I am a leaver, do I have to sell all my shares?

When a founder leaves the company, whether voluntarily or involuntarily, the good leaver / bad leaver clause provides for a call option mechanism for the benefit of (some of) the remaining shareholders and/or the company. Consequently, if the remaining shareholders and/or the company exercise this option, the leaving founder has to sell the shares subject to this option.

Whether the option covers all shares are only a portion thereof depends on the scenario under which the departure of the founder has been qualified.

This question involves a concept that all founders and investors will encounter at various times in the life of the company: vesting.

In the context of start-ups, the notion of vesting is a key tool for structuring the commitment of founders and defining the consequences of a possible departure. This notion can also be found in stock option plans. The idea is that the founder ‘definitively acquires’ an increasing number of his shares progressively over time.

In the context of a good leaver / bad leaver clause, vesting plays an important role in determining how many shares a founder may keep and, alternatively, at what price his shares may be bought back.

Below you will find the main scenarios relating to the number of shares that the outgoing founder may retain in view of the vesting concept:

• Bad Leaver: in the event of departure for serious misconduct (e.g. fraud), all shares may be bought by the company or the other shareholders, even if vested. Here, vesting does not really apply, because we are in a situation where the company favours total protection against the risks posed by the leaving founder and the definitive severance of all relations.
  
• Early Leaver and Good Leaver : if the founder leaves the company early (early leaver) or for a good reason (good leaver), the shares are divided into two categories:
  (i) those that are vested, dependant on how long the founder has been with the company, and
  (ii) those that are not vested.
  
  In these two situations, the founder could keep all his vested shares, and a purchase option would only be applicable on the unvested shares. This ensures a certain stability for the company while recognising the founder’s contributions.
  
  It is also often the case that both vested and unvested shares are subject to the call option. In this case, as the founder could be forced to sell his shares, we will see that the price per share will vary not only pursuant to the circumstances of his/her departure but also the number of shares vested vs unvested shares.

Vesting is often modulated according to the maturity of the company. For an early-stage start-up, vesting may be stricter in order to retain key founders. For a scale-up, it is sometimes possible to consider that part of the shares are vested immediately, in recognition of the milestones already achieved by the long-standing founders.

Vesting is essential in the shareholders’ agreement, as it clarifies the rights of each party in the event of departure. This vesting system helps to maintain a balanced relationship between founders and investors, while guaranteeing the company’s long-term stability.

As the interaction between vesting and the leaver qualification can significantly affect the number of shares that may be repurchased when a founder leaves the company, we have developed a good / bad leaver simulator to visualise these effects more easily and allow you to test different scenarios.

Frequently asked questions

Do I have to sell all my shares if I leave the company?

Not necessarily. It depends on the leaver status, the applicable vesting mechanism and, ultimately, what has been agreed in the shareholders’ agreement. A bad leaver may be required to sell all their shares, including vested shares. For an early or good leaver, the call option may be limited to unvested shares, although it is also common for both vested and unvested shares to be covered, with different prices applying to each.

What does vesting actually mean?

Vesting is a mechanism that determines how a founder’s rights over their shares evolve over time, usually depending on how long they remain involved with the company. In a leaver context, it is used to determine which shares may be repurchased and at what price.

Can a bad leaver lose shares that are already vested?

Yes. Depending on the terms of the clause, a bad leaver may be required to sell even shares that have already vested. This is one of the main differences with more favourable leaver situations, where vested shares may either remain with the founder or be repurchased on more favourable terms.

Is the vesting schedule the same across all startups?

No. The appropriate vesting schedule depends on the company’s stage, the founders’ existing contribution and the circumstances of the persons concerned. An early-stage startup may apply vesting over a longer period to encourage continued involvement, while in a more mature company part of the founder’s shares may be treated as vested from the outset to recognise value already created.

What happens to my vested shares if I leave as a good leaver?

Vested shares will often remain subject to a call option even in a good leaver situation. Depending on the structure, the founder may keep their vested shares, or both vested and unvested shares may be repurchased, with the vested shares benefiting from a more favourable price.