Leaver Provisions: The terms that founders fear the most

Leaver provisions, the rules that decide what happens to a founder’s shares if they leave the company, are among the clauses that cause founders the most anxiety. The fear (not entirely unfounded) is that they can wipe out a founder’s entire shareholding (or a substantial portion thereof) overnight.

This may seem harsh, but it’s a very common investor protection especially for investments in early-stage companies where founders are critical to the business (and their commitment to the company is part of the investor’s investment thesis).  The view is that a founder should be disincentivised to leave the company in the short/medium term following investment (or penalised if they do).  It’s also a way to create space in the cap table to incentivise replacement C-suite hires if a founder does leave.  It’s also a double-edged sword for founders - the same protections that can feel threatening personally are the ones that protect them if their co-founder walks away. 

This tension makes leaver provisions a frequent roadblock in term sheet negotiations, often soaking up a disproportionate amount of time and energy, and sometimes leaving a sour taste just as the relationship begins.

One of the aims of the latest BVCA model documents was to standardise this process and cut negotiations down to just a few key points - and, in our view, they’ve succeeded.

The current state of play

Under the BVCA model documents, a founder is categorised as a Good Leaver or a Bad Leaver.

A Bad Leaver (dismissal for cause, such as fraud or gross misconduct or breach of a founder’s non-competition obligations, and sometimes voluntary resignation) loses all value in their shares, as they are converted into worthless deferred shares. 

A Good Leaver (any departure that isn’t “bad”) keeps the “vested” portion of their shares, while the unvested portion convert into worthless deferred shares. Vesting usually runs over four years with a one-year cliff meaning that all shares that are subject to vesting will convert into worthless deferred shares if the founder leaves within the first year (technically this is reverse vesting, as founders legally hold their shares from day one, but restrictions fall away over time).

This is now the standard starting point. The consequences for a Bad Leaver are deliberately harsh, but the definition is meant to give founders comfort: shares can’t be taken unless the founder has done something clearly wrong, rather than being forced out for underperformance, for example.

What’s still up for negotiation

Less than pre-2023. Most discussions now focus on a handful of key areas:

• Resignation: Should resignation automatically make a founder a Bad Leaver? Investors often say yes; founders argue life can intervene. Few plan to leave, but a health issue, family situation, or burnout shouldn’t necessarily cost them everything. The latest BVCA updates removed resignation from the Bad Leaver definition, but we do still see investors push for voluntary resignation during the vesting period as a Bad Leaver event, albeit the argument is often stronger at the early stage rather than later stage investments.
• Pre-vesting: In more mature companies, founders may argue that some shares are pre-vested to reflect past commitment, with a new four-year schedule applying to the rest. If it’s agreed that a founder’s shares are no longer subject to vesting, then an investor would be well advised to ensure that pre-vested shares are still caught by Bad Leaver provisions though, so a summary dismissal would still mean total loss, regardless of pre-vesting.
• Dismissal for cause: This usually tracks the employment contract. If you can be dismissed without notice, you’ll typically be a Bad Leaver. Founders should ensure “cause” isn’t defined so broadly that minor or technical breaches trigger forfeiture.

Takeaway

Leaver provisions aren’t evil, but for founders, they’re the most consequential “standard” clause in any term sheet. Handled well, they align long-term commitment and protect value for everyone. Handled badly, they create resentment and fracture trust at the exact moment when teamwork matters most.