I am a leaver, can I force the purchase of my shares ?

While it is generally accepted that the good/bad leaver mechanism provides for a purchase option on the leaving founder’s shares for the benefit of the remaining shareholders or the company, a sale option for the benefit of the leaving founder can also be a valuable tool in these situations. This article explores this option, answering key questions to better understand how it works and its implications

What is a sale option for a leaving founder ?

A sale option is a right granted to the leaving founder, allowing him to sell his shares to the company or to other shareholders. If the founder decides to exercise this sale option, the company or other shareholders are obliged to buy his shares.
 
Why is this important for a founder ?

This enables the founder to guarantee that he will be able to liquidate his shareholding at the same time as he leaves the company, without being dependent on the wishes of the other shareholders. They pocket the value of their shares, determined according to the circumstances of their departure, to the extent of their participation in the project, and do not remain dependent on the future management of the company they have left.
 
Is it common for investors to accept to provide for a sale option?
 
In our practice at Beyond, it is quite rare for investors to agree to a sale option for a leaving founder. When it does happen, it is generally limited to situations where the departure is considered a good leaver event, and more specifically the termination of the collaboration by the company through no fault of the founder and often whilst applying a (substantial) discount to what is considered the market value. We identify this situation mainly in companies that are profitable and have substantial cash or where the other shareholders have substantial resources in relation to the value of the shares in question.
 
How does this sale option work ?

The put option is generally only exercisable if the the purchase option, available to the other shareholders or the company, is not exercised. This gives the company and any individual shareholders who actually wishes to acquire the share the ability to do so upfront and meanwhile – through the difference in exercise price – maximising the value for the founder, as the value retained for the purchase option will generally be higher than with the sale option.
 
What is at stake for the founder and the other shareholders ?

A founder may legitimately wish to sell his shares if he can no longer participate in the management of the company due to circumstances out of his control.
 
By accepting this mechanism, the remaining co-founders and investors could be putting themselves at risk, as the founder’s departure is always likely to cause harm to the company.  Even if it is at the initiative of the company, the departure of a founder remains a sensitive situation which generally occurs in complicated circumstances for the company.
 
Why is it crucial to balance the interests of founders and remaining shareholders?

A balance is essential to ensure the stability of the company after the departure of a founder. The decisions taken must take account of the needs of the departing founder while protecting the interests of the company and the remaining shareholders. The specifics of the case will need to be analysed, including the shareholdings in question, the founder’s personal situation and the profile of the other active shareholders, investors and the company. This will contribute to a smoother transition and the long-term future of the company.

Frequently asked questions

What is a put option for a departing founder?

It is a right of a founder who is leaving the company under specific circumstances to force the company or the other shareholders to purchase their shares, rather than waiting for them to make a proposal.

Why does a put option matter for a founder?

It gives the founder a way to exit their shareholding when leaving the company, rather than remaining a minority shareholder without a clear path to liquidity. Depending on the terms agreed, it may therefore provide greater certainty as to whether, when and at what price their shares can be sold.

Do investors readily accept this type of clause?

Based on Beyond’s experience, this type of protection is relatively uncommon. Where it is accepted, it is usually limited to specific good leaver situations, particularly where the founder’s departure is initiated by the company without fault on the founder’s part. The price may also be subject to specific conditions or a discount.

Can the put option be exercised at any time?

Usually not. Typically, it only activates if the call option has not been exercised. The company or the shareholders who therefore actually want to acquire the shares get priority before the founder can force a sale.

What is the risk for the remaining shareholders if the founder exercises their put option?

A put option creates a significant financial obligation at a time when the company is already dealing with the operational consequences of the founder’s departure. Depending on who is required to purchase the shares, it can therefore create liquidity pressure for the company or the remaining shareholders.