In what circumstances am I an early leaver, a bad leaver or a good leaver ?

The qualification of a leaving founder as an early, bad or a good leaver has a substantial impact on both the number of shares he or she may be required to sell and the price at which those shares are sold. But how can we classify these different departure scenarios?

In practice, we generally distinguish 3 different founder departure scenarios :

1. Early Leaver
   
   A founder is considered an early leaver when he/she leaves the company voluntarily before a certain period deemed significant for the growth of the company. This period generally varies between three and five years, depending on the maturity of the company and the prospects of a refinancing or an exit.
   
   This early departure can create constraints for the company, as it then has to quickly replace one of the key members of its team. Hence the need to properly include this type of situation in the good leaver / bad leaver clause.
   
   The specific clauses for early leavers and their consequences can be adapted according to the maturity of the company: in very young start-ups, the early departure of a founder can have serious consequences, whereas in more mature companies, this circumstance is often less relevant. Some investors are still keen to equate this to a bad leaver situation. At Beyond, we generally propose to apply conditions similar to a vesting schedule affecting the share price to an early leaver situation, where the purchase price of the shares increases over time the later the departure date takes place.
   
   The early leaver scenario can also cover the situation where it is the company that terminates the collaboration with a founder. This possibility, feared by founders, avoids that such an end to the collaboration falls into the more extreme situations of either a good leaver or a bad leaver. This generally occurs because a founder’s performance is disappointing or because there is such a strategic misalignment between founders that the only solution is for one of them to leave. It should be noted that one way of moderating the risk of abuse is to require the consent of a reinforced majority of the company’s shareholders or directors to proceed to terminate the collaboration with a founder.

2. Bad Leaver
   
   A founder is considered to be a bad leaver when the termination of the collaboration is the result of unacceptable behaviour on the part of the founder.
   
   These situations generally include acts that are prejudicial to the company or that threaten its proper functioning, such as fraud, gross misconduct or a serious breach of contractual obligations (in particular non-competition undertakings). The seriousness of these acts puts an end to any possibility of future collaboration with this founder. This type of departure is usually particularly damaging for the company as, in addition to the loss of a founder, it often has significant financial, operational and reputational consequences for the company, directly affecting its valuation.

3. Good Leaver
   
   A founder is considered a good leaver when his departure is the result of either (i) reasonable circumstances beyond his control, such as an incapacity to continue its activities (death, serious illness, etc.) or (ii) due to unacceptable behaviour attributable to the company. In these situations, there is no conflict or fault involved, and the founder generally leaves the company on good terms. This is the most favourable case for the leaving founder, since the good leaver clause preserves a certain recognition of his past contributions.

As these are purely contractual clauses, the parties are free to modify the qualification of a founder’s departure.

However, it is important to clearly define the residual category, i.e. the category that applies to any situation that is not precisely and expressly identified. Thus, it is quite possible to reverse the principles and strictly define the good leaver and early leaver scenarios and provide that any other departure of a founder is considered a bad leaver.

Furthermore, as a general rule, a balance should be sought between (i) the shares covered by the purchase option, (ii) the qualification of the scenarios for a founder’s departure, (iii) the purchase price retained for each scenario and (iv) the beneficiaries of the call option, taking into account the maturity of the team and the company as well as the interests of all shareholders.

In practice, the qualification of a departure as early, bad or good leaver can have significant financial consequences for the founder. To better understand these effects, you can test different departure scenarios using our good / bad leaver simulator, which illustrates how the leaver qualification may affect both the number of shares repurchased and their value.