Companies use leaver clauses to determine what will happen to a person’s equity when they leave. Depending on the circumstances of their exit, they might keep all their vested shares, or lose all their shares and options, vested and unvested. Most of the time, though, there are differences in how founders and employees are treated.
Leaver clauses come down to whether you’re classed as a ‘good leaver’ or a ‘bad leaver’ – and usually, it’s much easier for a founder to be deemed a good leaver. Founders are usually treated as good leavers as long as they haven’t committed an act of gross misconduct, or a crime. This means they typically keep all of their vested shares and some even have a provision that accelerates the vesting process in certain situations.
In contrast, the definition of a “good leaver” is much narrower for employees. It typically only includes employees who retire, become seriously ill or die, or are made redundant through no fault of their own. This narrow definition means that employees who resign to take a different job are placed in the same bad leaver category as those who steal data, or commit other forms of gross misconduct. They typically lose all their unvested and vested shares.
Founders have an outsized impact on the company, and when a founder moves on their departure needs to be handled carefully. But should their equity be treated differently from other employees?
Let’s dig into how and why the situation is different for founders and employees under leaver clauses, and cover some options companies have to establish how both these groups can be treated.
As you may have already experienced first-hand, deciding what’s fair when it comes to equity can be complicated. Our guide to leaver clauses goes into more depth on this topic.
Why are founders and employees treated differently when they leave?
The disparities in how leaver clauses typically treat employees versus founders come down to the fact that founders have more direct impact on the company.
Being lenient with departing founders is in the company’s best interest in the long run. The departure of a founder often has a significant impact on a company: but using equity to force a founder who has lost interest to stay can be even worse. Founders usually hold high positions, overseeing important decisions and large teams. If they’re demotivated—biding time until their shares vest—they can become a bottleneck, holding back innovation, and dragging down morale.
Another reason that companies make it easier for founders to keep their shares is that equity often makes up a more significant part of a founder’s compensation when compared to an employee’s. Whereas employees receive salaries, founders often pay themselves well below market rate for the first few years. Instead, they hold most of their net worth in equity.
If a company takes away all the shares a founder holds when they leave, you’re effectively taking away the only compensation they earned in those early years. In addition, by classifying most founders as good leavers, companies give them the opportunity to reap the benefits of the risk they took, even if they didn’t stick around until the sale of the company or IPO.
However, it’s a balancing act. Given that founders typically hold a significant proportion of a company’s shares, you need to make sure that you are treating future dilution – from future funding rounds, new hires, etc – into account.
One provision that is exclusively reserved for departing founders is the single- or double-trigger acceleration. This helps founders protect their equity in the case of an acquisition, a merger, or the company otherwise forcing them out through no fault of their own.
This type of provision underlines the disparity between what founders and employees are able to negotiate in terms of their equity on departure. It’s very unlikely any employee would get such beneficial terms.
Leaver clauses: what to bear in mind
There are explanations for the differences in the ways departing founders and employees are treated. It’s not that founders haven’t earned their shares, but employees are often treated far too harshly.
If you’re serious about having those difficult equity conversations, we recommend enabling leavers of all levels to keep their vested shares as a reward for their hard work.
To find out more about best practices for leaver provisions, read our full-length guide to good leaver and bad leaver clauses.
To learn more about how Ledgy helps ops, people, legal and finance leaders scale smoothly without equity getting in the way, book your demo today.
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