Leaver Provisions Survey

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We did a ‘Snap Survey’ of Funds to find out about their current approach to what sometimes can be a very emotional point in negotiating Funding, for the founder(s) – ‘Leaver Provisions’.

It can come as quite a shock for Founders to be told that if they leave under certain conditions they might lose all or a substantial chunk of their equity!

The reasons are because at one extreme if they were to commit a major crime or say leave to join the direct competition shortly after a substantial investment then the very survival of the business could be in jeopardy.

This means the investment made by a Fund, often highly or sometimes exclusively based upon their belief in the founder(s), is entirely at extreme risk. 

Re-funding the business as well as finding a top-quality replacement(s), who typically expect a good equity package is a consequence of such an issue.

Lawyers drafting these clauses often do not help by making the wording sound like vindictive punishment rather than protecting the future.

Shades of grey are accommodated by having varying lengths of time when the founders’ (and other leaders) equity is at risk and also whether they get market value or something rather less for it. 

These variations are accommodated by having different categories of Leaver – Good (Including death!); Bad; Intermediate and sometimes more.

To add to the uncertainties,  how the equity was acquired in the first place i.e. purchased; earned or otherwise and the amount, are all taken into account in what for some becomes a highly charged atmosphere.

Unlike a few years ago, there seems a greater willingness to negotiate on these and other points, especially if the Fund is in a competitive situation with other Funds. You would not expect me to pass up such an opportunity to remind you this is what we at ScaleUp Group do for our entrepreneurial clients when we obtain funds for them, of course!

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