What Happens When A Founder Leaves A Startup?
What Happens When A Founder Leaves A Startup?
A founder leaving triggers a series of practical and legal questions: Who owns what? What happens to the shares? How will responsibilities be reallocated? These questions are addressed by core legal documents: Articles of Association or Vesting agreement . Let’s unpack this a little further.
Essential Steps After a Founder Leaves
Step one: Decide what kind of exit this really is – Are they leaving as a GOOD Leaver or a BAD Leaver?
What is a Good Leaver? | § Founder leaves without any fault
Example: Death, permanent incapacity, they are wrongfully terminated |
What is a Bad Leaver? | § Founder leaves where they have don something wrong
Example: Gross misconduct, criminal offences like fraud or other termination with cause |
Once you know which kind of Leaver you’re dealing with, the next step is figuring out what happens to their shares.
Shares of Good Leaver | § Required to transfer their vested shares at market value or § Allowed to retain their vested shares |
Shares of Bad Leaver | § Required to transfer their vested shares at nominal value but § Board/ company has discretion in deciding it. |
But this raises a few important questions:
1. What exactly are vested shares?
Vesting is the process through which employees (or founders) earn their right to own shares over time. Instead of receiving all their shares at once, they “vest” gradually based on the company’s vesting criteria and schedule. These usually outlined in a Vesting Agreement.
2. How does the process actually work in real life?
Usually, they are set out in the Company’s Articles on how shares are transferred. It could be shares buy-back, shares moving to an option pool, shares reallocation, shares offered to existing shareholders. In Bad Leaver cases, shares are often converted to worthless deferred shares to avoid tax complications.
3. How are shares transferred?
The Company’s Articles set out exactly what happens when a founder leaves: whether the company buys back the shares, moves them into an option pool, or reallocates them to a new hire.
4. How much discretion does the Board or company really have in all this?
The Board often has some flexibility in deciding how leaver provisions are applied, especially in borderline cases, but their powers are ultimately guided (and limited) by what’s written in those documents. It’s usually set out in the Company’s Articles.
So it’s pretty clear. Your Vesting Agreement and Company’s Articles aren’t just paperwork you sign and forget. They’re the backbone of how your startup deals with tough moments. When a founder leaves, they determine who owns what, how shares are handled, and how fairly everyone is treated.
What Should I Include In Vesting Agreement?
It should specifically outline these components:
Equity details | § The exact number of shares, stock options… § Their exercise price |
Vesting Schedule | § Timeline and condition § Monthly or quarterly vesting |
The Cliff Period | § Timeframe where no shares vest |
Milestone Conditions | § This specifies performance metrics the employee must hit to unlock their shares |
Leaver Provisions | § Clear definitions of “good leaver” or “bad leaver” § Indicates whether the company can repurchase unvested shares at nominal price |
Transfer restrictions | § Prohibiting selling or transferring unvested shares. |
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What Should I Include In Company’s Articles
Company Name | § The official registered name |
Members’ liabilities | § Whether liability is limited or unlimited |
Share Capital and shareholdings | § Initial capital structure § Total number of authorized share § Different classes of shares |
Share transfer | § Set out rules on share transfer |
Board discretion power | § State how much discretion does the Board enjoy |
Leaver Provisions | § Define what happens when a founder leaves |
Vesting Rules | § Acknowledge or refer vesting provisions |
Dispute Resolution | § Mediation or Arbitration options |
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At the end of the day, founders don’t plan to leave. But life and business are unpredictable. What matters is how well your startup is prepared for that moment. A clear Vesting Agreement and a well-drafted set of Company Articles don’t just protect the business — they protect the relationships behind it. Build those foundations early, and your startup will be ready for whatever comes next.
