The good, the bad and the ugly:
negotiating leaver and vesting provisions on venture capital deals

Published: 5 December 2020

The most comprehensive guide you are likely to find on understanding and negotiating leaver and vesting provisions on VC deals.

How can founder equity be clawed back…?

Nothing ignites passion, frustration and confusion in negotiations quite like leaver and vesting provisions. Few other subjects are formed by such closely woven strands of corporate, tax and employment law. On equity deals, leaver mechanics will invariably be amongst the last negotiation nuts to crack.

This Guide provides a straightforward explanation as to how UK leaver provisions work but is principally focused on leaver provisions as they apply in the venture capital industry. Also included are thoughts on the subject from our friends at independent law firms in some of the major technology jurisdictions.

Do please note that what is ‘market’ at time of writing will be subject to change and will always differ between jurisdictions.

This piece was compiled by Henry Humphreys, Annette Beresford and Jeremy Glover, with input from best friend law firms overseas.

The good, the bad and the ugly

negotiating leaver and vesting provisions on venture capital deals

The good, the bad and the ugly

negotiating leaver and vesting provisions on venture capital deals

Leaver provisions put equity at risk

The primary purposes of leaver mechanics are:

  1. To incentivise the founders to remain with the business by putting their equity at risk if they leave.
  2. As a value adjustment mechanism. The investor has paid for its shares at a certain pre-money value, which therefore values the founders’ shares at the post-money value. Venture capital valuations, however, are forward looking and predicated on the venture reaching scale and a major exit one day. And the investor – looking ahead to that eventual exit one day – will be assuming that the founders will be working for the venture for some or all of the time needed to get there. If a founder bails out before that exit then fairness would suggest that she loses some or all of her equity.

There are many different ways in which to construct leaver mechanics and there is a wide spectrum as to what is ‘market’. Further still, how the leaver mechanics work is usually utterly dependent upon the context in which the founder has obtained the equity put at risk.

Context is key

Reading up on how leaver mechanics are ‘supposed’ to work can be confusing if not infuriating. Much of the literature online only looks at leaver provisions in one particular context (a seed stage tech venture for instance), and this can then cause a great deal of confusion if the reader is thinking about leaver provisions in a different context (such as a management buyout).

And just when you think you have cracked your understanding as to how leaver mechanics ‘should’ work, relative bargaining positions in the market change and with them what is ‘standard’ for founders leaving a business.

And then of course market practice differs between jurisdictions.

Where you find leaver provisions

Leaver provisions are not just found on venture capital deals. You find them in private equity buy out structures. And in option scheme rules. And sometimes in the deferred consideration mechanics of a sale and purchase agreement in an M&A context.

In fact, leaver provisions may be relevant in any scenario where employees, founders or other officers (or sometimes even consultants) hold equity interests whilst performing services to the issuing company (or a company in its group).

It is not unusual for a founder to hold shares that are subject to leaver provisions in the articles of association while at the same time holding options (perhaps over a different class of share) which are subject to a different set of leaver provisions in the option rules.

Sometimes you see leaver mechanics written into put and call options or in a joint venture scenario, these will be highly specific to the context of each deal.

If dealing with a company or parties subject to Shariah / Islamic laws then leaver provisions need to be carefully tailored so that they are ‘non-confiscatory’. That said, the practice locally by most clients – in the technology space especially – is to keep the documentation to the extent possible under DIFC or ADGM common laws.

Be careful with cookie cutters

The terminology for the constituent principles of leaver mechanics can be applied across the contexts. We get into that further below. But the commercial drivers in each context, and the relative negotiating positions of the parties, can be radically different.

Nevertheless, very often on a transaction one party (or even sometimes its lawyers) will have seen leaver provisions working in one context (a management buyout, say) and then argue to replicate those provisions (sometimes on the basis of not much more than mere familiarity) in a different context (such as on a seed funding round for a start-up). The result is usually far from optimal in terms of the language put forward and then also in terms of the costs and time incurred in negotiating to make it fit the context.

Resulting tempers often fray.

Valuations for venture-backed companies are forward looking and usually have nothing to do with what’s on the balance sheet. Investors agree to these valuations because they think that the business might one day achieve massive scale and an eventual exit at a valuation many orders of magnitude larger than the valuation the investor went in at. The founders sell the investors on this vision and valuations are agreed accordingly.

The theory goes then that – at the point of investment – the founders are getting the same valuation for their equity as the investor, and that valuation is also forward looking and predicated on the founders remaining with the business for some, most or all the way to exit. The investors pay for their shares in cash; the founders in (future) sweat. If the founders leave early then the value of their equity needs to be re-calibrated to take account of the fact that the execution of the vision sold to the investor was not completed.

The means by which that re-calibration takes place are the mechanics of leaver and vesting provisions. What those provisions say and how they are structured will never be standardised and will forever reflect the relative bargaining positions of founders and investors, driven by the levels of capital available in the market looking for the hottest deals

Henry Humphreys, Managing Partner, Humphreys Law

Nuts, bolts and moving parts

To understand how leaver mechanics work on venture capital deals, you need to understand the nuts and bolts of those mechanics. Here are the principal moving parts to understand:

Getting equity back once given away

Once equity is granted or issued to the founders, a company will need a legally binding but fair mechanic of some kind to get it back.
This is the fundamental point to bear in mind when dishing out options and shares.

The equity at risk

Obvious really, but the leaver provisions must attach to the specific equity that the parties want to put at risk.

When dealing with shares that have been put at risk, leaver provisions should preferably be ‘hard wired’ into the articles of association of the issuing company rather than working as an agreement between the founder personally and the other parties to a shareholders’ agreement (signing up in their personal capacities).

That latter approach does work contractually, but it is generally considered better (and more likely to be enforceable) to have the mechanics included in the articles. There may also be tax advantages to including the leaver restrictions in the Articles depending on the structure.

Note that the articles are a public document, so including leaver provisions there may not suit a company that is concerned to keep them confidential.
Where a founder can move her shares to ‘permitted transferees’ under the articles then the leaver provisions should work so that the restrictions still apply after any such transfer.

Leaver triggers - ceasing to be an employee

Who is a ‘leaver’? Only if the founder is ceasing to be an employee, right? Well, be careful…

The process of ceasing to be an employee needs to be carefully handled so as to comply with notice periods, periods in the ‘garden’ and employment law.

Employment contracts have notice periods and employees have statutory rights, and so ideally the trigger for enforcing the leaver mechanics should (from a company/investor perspective) be the point at which notice of termination is served regardless of what happens thereafter. In this case, care is required when drafting the interaction between leaver provisions and exit provisions.

So too be careful to follow the process prescribed under the articles and company law when removing a director.

Who pulls the trigger?

Where it is not the founder voluntarily resigning, think about who is making the decision to remove the employee.

In a context of a buyout – where the invested fund controls the company and the board – the fund will do the firing and hiring.

In a venture capital context, however, the investor has a potential problem. It does not control the board. It is unable to tell the directors what to do (notwithstanding that it will have veto and consent rights).

If a co-founder is underperforming and should be managed out of the business, then the investor is going to be reliant on persuading the other founders to do the managing out.

So too, a co-founder should consider a scenario where an investor and the other founders resolve to manage out that co-founder.

Careful drafting across the document suite can plot a way around these issues but only if sufficient thinking has gone into legislating for the circumstances of the deal…

Additional leaver triggers

From the point of view of the investor/fund and the employing company (and the remaining founders perhaps), ideally the definition of a leaver trigger includes not only ceasing to be an employee but also other events where – whether or not employment comes to an end as a result – the leaver provisions automatically kick in.

These usually include the following events –

  • conviction of a criminal offence, usually ignoring road traffic offences not punished by way of a custodial sentence;
  • committing fraud against any group company (which actually is picked up in the point above since fraud is a criminal offence, but is usually added so there is no doubt at all about the seriousness of fraud);
  • breaching the restrictive covenants (or other key terms) in a share purchase agreement or shareholders’ agreement (note that whilst the Courts are more likely to enforce covenants in such documents compared to employment agreements, they can still be declared void for public policy reasons if drafted too widely); and
  • bankruptcy.

From a founder perspective, expanding the scope of the leaver triggers in this way might seem alarming but it is hard to argue against the above since whether or not they happen should remain within control of the individual founder.

To successfully argue against the inclusion of the additional leaver triggers then a founder would usually have to be able to point to her own employment contract and those trigger events being included there, giving rise if triggered to summary dismissal (and in turn triggering the leaver provisions), but even then the investor – a minority voice on the board – will not on its own be in a position to insist that summary dismissal is forced through.

And founders who remain with a business are usually aligned with the company/investor when another founder leaves the business and so may be thankful one day that the leaver triggers were in fact expanded in this way.

Note though that these additional leaver provisions are not included in the BVCA model documents for VC deals.

Classification of leavers (and world of possibilities)

If your mechanics properly identify when a founder becomes a ‘leaver’, then you need to think about whether you want to take account of the circumstances in which they left.

You might think, for instance, that a founder who has defrauded the company and gone to prison should be treated differently to a founder who has fallen ill through no fault of her own.

There is a world of possibility out there and careful thought should go towards the differing classifications of leaver…

Bad leavers

Most commonly, the drafting is being put forward by the investing fund’s lawyers or those of the employing company.

The fund or the company will usually want to define bad leavers as being anyone who is not within the limited category of good leavers.

The founders, if they have the leverage in negotiations, will ask for the reverse and have the language identify the specific circumstances where they will be a bad leaver, absent which they will be good leavers.

Not many founder teams in the UK have the leverage to win this point. That said, the BVCA model documents for VC deals specifically define a bad leaver and say that a good leaver is not a bad leaver.

And, if the founders do win it, then for those founders that stay with the business it may actually backfire if one of their number leaves and is treated too leniently from their perspective as a result.

Good leaver

Usually, language put forward will say that founders leaving for these reasons will be good leavers:

  • death;
  • ill health, but then excluding circumstances where ill health was brought on by substance or alcohol abuse; and then think about how long ill health needs to carry on for and whether this might need to be signed-off by a doctor;
  • retirement, and this used to usually say at age 60 or above but should now always cross refer to company policy on redundancy or risk falling foul of age discrimination law (and then company policy should be legally compliant of course, although that is easier to sort post-completion in due course and can flex if necessary);
  • unfair dismissal, and you want the dismissal to be unfair for a substantive reason and not a procedural hiccup; and then you’d want the decision made from the Employment Appeal Tribunal or a Court from which there is no right to appeal);
  • dismissal by the company for reasons other than cause, and ‘cause’ itself should be clearly defined to include gross misconduct, criminal activity, fraud and so on; and
  • voluntary departure by the founder after a period of time (when they could not then have been dismissed for cause), which you do not always see. But in some contexts, it is appropriate for founders leaving after a certain point in time to be treated as good leavers. Often, however, a founder who chooses to leave will be classed a ‘bad leaver’. Or it could be considered whether to put this in a definition of a ‘grey’ leaver (which is considered below).

The drafting should also include a discretion allowing the investing fund or employing company to determine that a leaver is a ‘good leaver’ (even if she would not otherwise qualify as such) – there may be circumstances not captured above to merit this.

Grey/intermediate leaver

On some deals, the categories of leaver will not split neatly into two, good and bad. A further definition of a ‘grey’ or ‘intermediate’ leaver is needed and will likely be a founder leaving in a defined set of specific circumstances.

Usually this is a founder leaving the business other than in circumstances where he or she could have been or was dismissed for cause.

Usually, you see grey leavers have a vesting schedule in a construct where:

  • bad leavers get nothing;
  • grey leavers keep/see fair market value for their vested shares; and
  • good leavers keep it all/see fair market value for it all,

and vesting will usually run by reference to time and not by reference to the achievement of milestones, although it technically can.

Treatment of leavers

With the categories of leaver set, the drafting should then make clear how each type of leaver is treated upon leaving the company.

One or more of the following usually applies:

  • the leaver has to put some or all of her shares up for sale or agree for it to be repurchased by the employing company (with the value to be received on such sale / repurchase depending on the category of leaver);
  • some or all of the leaver’s shares convert into a new class of worthless deferred shares; and
  • nothing happens, the leaver keeps her shares.

Where equity is held as options, then it is much easier to claw it back – some or all of the options simply lapse (which means the contractual right to exercise those options no longer exists).

Vesting or earning the equity

Time itself is a variable.

Most investors will not be comfortable that the founders have in effect earned their shares at the post-money value on the day of the investment.

And the investor will usually want the founders to earn their shares over time by reference to a vesting schedule, typically running for two to five years following completion of the investment.

Actually, it is better thought of as a reverse vesting schedule.
The founders already hold all their shares, but the leaver provisions, if triggered, may cause them to lose some or all of those shares and the vesting schedule helps dictate how many.

Usually, vesting takes place on a monthly basis. In the case of a three-year vesting schedule for instance, 1/36th of the at-risk equity (reverse) vests per month and 100% will have (reverse) vested at the start of the 37th month.

Vesting 'cliffs'

An investor will be wary that a founder may leave shortly after completion of the investment, which of course may impact negatively on the venture; and so watching such a leaver walk away with any vested equity at all may not be palatable.

One-year cliffs are therefore common, where no equity vests in year 1 but at the end of year one the whole year’s equity vests and for the rest of the vesting period it is monthly vesting.


From a founders’ perspective, closing the investment round with all her equity at risk under the leaver provisions may feel like a retrograde step. Particularly so if:

  • she has been working for the business for some time at a less than market salary; and/or
  • the new leaver provisions are on a series X round and re-set the vesting clock agreed on the series X -1 investment round.

If she has the leverage to negotiate, that founder can ask that some percentage of her shares are ring fenced away from the leaver provisions on the basis that they have already been earned and should not be put at risk.


If a leaver’s shares are put up for sale, then you will need to legislate for who gets to acquire them and in what order of priority.

Bear in mind that if it is the company buying back the shares to hold in treasury or cancel then the company will need an equivalent value in positive distributable profits to the purchase price (or go through a reduction of capital) or must comply with one of the other methods under English law for financing a buyback. Company law is prescriptive about how this can be achieved. Instances where it has gone wrong are not unknown to be picked up in due diligence at exit, and the consequences there can be sub optimal to say the least.

Consider also that stamp duty will be payable (at the rate of 0.5% of the consideration payable for the shares) on the transfer of the shares (including where it occurs pursuant to a buyback). And there could be employment tax implications, depending on the amount of consideration payable relative to the shares’ market value (as determined for tax purposes). For example, if the shares are acquired by a remaining founder for free or at less than market value then that founder’s position as regards income tax and NICs should be examined (and the employer’s NICs position).

If the company buys back the shares, then there is a risk that the difference between what the founder paid for the shares and the price paid by the company is treated as a distribution and taxed as a dividend (i.e. subject to income tax) rather than capital gains tax.

Or if a leaver sells his or her shares for an amount in excess of market value (as determined for tax purposes), income tax and NICs (including employer’s NICs) may arise in respect of the excess. Those situations could potentially arise in circumstances where the leaver provisions provide for a formula to determine the consideration to be received by leavers for their shares. Applying such formula may produce an amount which is different from the shares’ market value (as determined for tax purposes).

Power of attorney

Leavers might not want to play ball and sign stock transfer forms, for instance. A power of attorney should be positioned within the document suite so that documents can be signed on behalf of the leaver and the mechanics railroaded through without being beholden to the leaver.

HMRC approved share plans

In some HMRC approved share plans, the leaver mechanics may have to be tweaked to ensure compliance and secure favourable tax relief.

What’s market right now – US
Written by Steve Hurdle of Loeb & Loeb LLP

As in the UK, different contexts call for different leaver provisions. Some, like leaver provisions for rollover equity following a company’s acquisition by a private equity firm or retained equity following a stock acquisition, are highly negotiated and transaction specific. These provisions are designed to give the buyer of the company the benefit of the founder’s or employee’s continued services post-closing by incentivising performance and penalising leaving.

On the other hand, equity grants to founders and employees of early-stage companies (including most technology start-ups, though the same general structure frequently applies to other industries) follow a more consistent formula when the start-up company is a US corporation. US limited liability companies (LLCs) tend to have more heavily negotiated provisions, tend to be more founder-friendly, and therefore have more variety in the equity features. The below descriptions focus on early-stage US corporations.


Because a founder is involved with her company at a time when the stock of the company is worth zero or near-zero, most founders acquire stock for a purchase price equal to its par value. By doing that, and among other benefits, the founder starts the clock on obtaining favourable long-term capital gains tax treatment (which requires the founder holding the stock for one year or more) upon a sale of the founder’s equity.

Because the founder actually purchases shares outright, the shares are subject to ‘reverse vesting’; that is, the shares are subject to a repurchase option exercisable by the company at the lower of the original purchase price or fair market value if the founder leaves, with the number of shares subject to this repurchase decreasing over time. The remaining vested shares are sometimes subject to a repurchase option exercisable by the company (or, in some cases, one or more investors) at fair market value. The vesting period is customarily four years, and typically lapses monthly or quarterly, sometimes with a delay in the first vesting date for a one-year cliff.

This vesting schedule is commonly accelerated upon the occurrence of a termination by the company without ‘cause’ or by the founder for ‘good reason’ within a specified time before or after a change in control of the company. Because there are two conditions that must be satisfied to accelerate vesting (the termination event and the change in control), this is referred to as a ‘double-trigger’ acceleration.

The definitions of ‘cause’, ‘good reason’ and ‘change in control’ are often heavily negotiated and must be precisely defined to minimise the possibility of disputes around whether an acceleration has occurred.

Alternately, ‘single-trigger’ acceleration, based only on the termination of the founder, is more founder-friendly and is a feature of some deals.
Although a founder may provide for founder-friendly vesting terms (or no vesting at all) in her grant documents, investors often require more investor-favourable terms as a condition of their investment. It is not uncommon for an investor to impose new vesting conditions on shares that have already vested, particularly in the company’s first third-party equity financing.


In contrast to founder stock purchases, most employees will join a company after the company has attained some meaningful level of value. If the employee were to purchase stock, a significant cash outlay may be required.
Alternatively, if the employee were to be granted stock without purchasing it, the employee would be taxed on the value of that stock (for tax reasons, depending on the vesting provisions of the stock award, the tax may arise on each vesting date), resulting in phantom income for the employee.
For that reason, after the very early stages of the company, employees are customarily granted stock options. Stock options are typically subject to four-year vesting with 25% vesting on the first anniversary of the grant date and the remainder vesting in equal monthly instalments. Upon any termination of the employee, unvested options are forfeited without consideration, and depending on the circumstances of the termination, even vested options may be forfeited.
Employees typically have a 90-day window in which to exercise their vested options after termination, after which the company may also have the right to purchase the employee’s shares at fair market value. An employee is usually not guaranteed acceleration of vesting upon termination, but the company’s board may decide to permit acceleration on a case-by-case basis or in connection with a change in control of the company.

Some employees, although not founders themselves, become employed by a company at a time when the stock is near valueless. In that case, the employees may purchase stock outright, subject to buyback provisions of the type applicable to founders, although the terms tend to be less friendly to employees than the founder provisions described above.

An employee may also be granted other equity-like instruments, such as phantom stock. These instruments are more customised to the employee and may or may not provide for vesting and may terminate in their entirety when the employee’s employment is terminated.

What’s market right now – Australia
Written by Andrew Clark of Talbot Sayer

The Australian venture capital market tends to follow the trends occurring in both the UK and the US and much of what has been discussed above applies equally in Australia with a few notable exceptions.

As with the UK, tax is a key driving factor in determining the most efficient means of issuing equity to employees, and the age, size, and industry in which the company operates will often dictate the type of equity plan that is adopted.

Whilst option schemes, sweat equity and discounted share plans are common, Australian companies also regularly issue shares to employees at market value via a loan funded scheme where the company funds the value of the loan via a nil interest limited recourse loan.  The loan is then repaid via dividends or the proceeds of the exit.  The key advantages to this structure are:

  1. the shares are issued at full market value, which is attractive to existing shareholders;
  2. the employee receives the upside benefit without the downside risk (due to the limited recourse nature of the loan); and
  3. the cost base for capital gains tax purposes is market value meaning no tax surprises on sale.

Other unique features under Australian law include a financial assistance regime that requires regulatory and shareholder approval before undertaking a share buyback (for example in a leaver scenario) or where the company is funding the acquisition of its own shares (such as a loan funded scheme).  To avoid this process and fall within the financial assistance exemptions, equity is usually issued under an ‘approved employee share scheme’.

With companies conscious of the perils of enforcing post exit restraints and the cash flow implications of implementing buy backs, we have also seen a number of companies defer payment for leaver shares until expiry of the restraint period.

Other notable differences from the position in the UK include:

  1. Typically, the leaver provisions are contained either in the shareholders agreement or a separate share option plan, and not in the company’s articles (constitution).
  2. Australia does not have a concept of treasury shares, so a repurchase by the Company is usually the only viable option.

What’s market right now – Austria
Written by Thomas Kulnigg and Dominik Tyrybon of Schoenherr

Founder vesting

Founder vesting provisions are a common feature in Austrian VC documents. Leaver provisions are typically implemented in the (non-public) shareholders’ agreement.

As is the case in the UK, Germany and other jurisdictions, founders usually receive their shares upon foundation of the company for an issue price equal to their nominal value. Since the Founder(s) already hold all their shares at foundation of the company, the leaver provisions, if triggered, may cause them to lose some or all of those shares, which is generally dictated by a vesting schedule. Such form of vesting is also referred to as ‘reverse vesting’.

Leaver provisions are generally structured in Austria by way of the founder(s) granting an exclusive and irrevocable right (call option) to the other shareholders of the company, on a pro rata basis, to purchase a certain number of shares (depending on the leaver event) if a leaver event occurs during the vesting period (‘Special Purchase Right’).

Typical vesting schedule

Usually, vesting takes place for a vesting period of four years, in quarterly or monthly instalments, often combined with a vesting cliff of six to twelve months.

Qualification of leaver

As in the UK, vesting provisions in Austria generally distinguish between good and bad leavers. However, recently, a further definition of grey/intermediate leaver has become popular to accommodate the various interest of the parties.

  • Founder(s) are generally considered to be a ‘good leaver’ if such founder ceases to be employed or engaged or appointed as managing director without good cause, including occupational disability. An ‘occupational disability’ may be a physical or mental condition that prevents a founder from performing the essential duties of their job. This can be caused by an injury or illness that occurs on the job, a pre-existing condition that is made worse by the demands of the job or an injury or illness that has been developed outside of the demands of the job but prevents the founder from performing the essential duties of his job.
  • Founder(s) are generally considered to be a ‘bad leaver’ if such founder ceases to be employed or engaged or appointed as managing director with good cause.
  • Founder(s) are generally considered to be a ‘grey/intermediate leaver’ if such founder leaves the company without reason. For example, the founder decides from one day to the next that he does not want to continue. However, there must not be any reason present that would entitle the company to terminate or dismiss the founder for ‘good cause’.

In Austria, ‘good cause’ usually means the legal definition of ‘good cause’ in the Employment Act (Angestelltengesetz). The Employee Act differs between reasons that are qualified as ‘good cause’ from an employer’s and an employee’s perspective.

The reasons outlined in the legal definition materially relate to each party’s main obligations under an employment relationship. This may include, for example, when the employer unduly reduces or withholds the remuneration due to the employee or if the employee, without a lawful impediment, fails or persistently refuses to perform his/her services for a period of time which is relatively long considering the circumstances.

The legal definition of ‘good cause’ is also sometimes supplemented by the following reasons: (i) conviction of or indictment for any crime constituting a felony or that has, or could have, an adverse impact on the performance of the founder’s duties to the company, (ii) material breach of the shareholders’ agreement, (iii) material violation of company policies, this is only in case of gross negligence or willful misconduct.

In general, depending on the bargaining powers, the definitions of ‘good leaver’, ‘bad leaver’, ‘grey/intermediate leaver’ and ‘good cause’ are sometimes (heavily) negotiated. To avoid disputes, these definitions should be precisely defined and thought through.

Treatment of leaver

Depending on the triggering event, different rules apply:

  • If a bad leaver event occurs during the vesting period, 100% of the bad leaver’s shares are subject to the Special Purchase Right.
  • If a good leaver event occurs during the vesting period, 100% of any unvested shares of the good leaver at that time are subject to the Special Purchase Right.
  • If a grey/intermediate leaver event occurs during the vesting period, 100% of any unvested shares and 50% of vested shares of the grey/intermediate leaver at that time are subject to the Special Purchase Right.
  • In the event that any leaver event occurs during the vesting cliff, 100% of the leaver’s shares are subject to the Special Purchase Right (see also section below on Vesting Cliffs).

Vesting Cliffs

Six to twelve-month cliff periods are common in Austria, where no shares vest in the first six to twelve months but at the end of such cliff period the whole six to twelve months vest and for the rest of the vesting period the general monthly or quarterly vesting is continued. In the event that during such period the founder(s) leave the company, 100% of the leaver’s shares (irrespective of the qualification of the leaver) are subject to the Special Purchase Right.


Founder(s) have often already been working for their company for some time and often at a salary below the market standard. In such cases, it is particularly hard for the founder(s) if all their shares are subject to vesting provisions. The same is true if vesting was agreed upon in the first financing round. In most financing rounds, an existing vesting schedule is simply restarted. This is disadvantageous for founders who have been working for the company for a long time and must earn their shares from scratch each time the company raises additional funding. Hence, vesting schedules are always negotiated in every financing round.

Depending on the negotiating position of the founder(s), one often sees various arrangements concerning the restart of the vesting schedule. For example, a certain percentage of the shares are excluded from the vesting provisions, because they have already been earned and should not be put at risk. Another variant is that a percentage of the shares are considered to be earned and in principle not endangered, but only in case of a bad leaver do the shares become subject to the Special Purchase Right.

Use of leaver shares

In Austria, founders hold common (ordinary) shares. Those shares are subject to the Special Purchase Right (as defined above). It is only in the leaver scenario that it is determined how many shares the founder can keep or must give up.

In many cases, those shares are used exclusively to incentivise future key employees or contractors of the company. However, the shareholders’ majority can decide not to use such shares to incentivise future employees of the company. The definition of ‘the majority’ is again part of negotiation but it usually means the investor majority.

Purchase price for leaver shares

Usually, the purchase price for the leaver shares corresponds to the nominal value of such leaver shares.


Acceleration often applies. Recently, we often see double-trigger acceleration, with the first trigger being the exit transaction and the second trigger being that the founder remains with the company for a certain period after the exit.

Non-founder vesting

Key employees and other key stakeholders play a key role in the success of any company – even more so in start-ups. Since such start-ups do not always have the appropriate financial resources and good salaries alone are often too little to attract talent, they often offer employee share ownership schemes.

Austrian law offers several variants for employee share ownership:

  1. transfer of shares in the company;
  2. granting of options on shares; or
  3. ‘virtual shares’ entitling to a bonus payment as if the employee held ‘real shares’.

The most common variant amongst start-ups in Austria is virtual employee participation programs, in which employees are entitled to a cash bonus payment in the event of a triggering event (generally an exit of the company). Depending on the specific terms of the individual virtual employee program at hand, expected payments under such program may have to be booked (i) as a liability (on the balance sheet), (ii) reported as a contingent liability as a separate item below the balance sheet or (iii) not booked or shown in the annual financial statements at all.

Virtual shares granted under such programs usually vest over a period of four years in quarterly or monthly instalments, subject to a vesting cliff of six to twelve months. In some cases, de-vesting provisions apply, i.e. virtual shares lapse again over time if a holder leaves the company.

Acceleration (single trigger or double trigger) often applies.

Upon any termination of the employee, unvested virtual shares are forfeited without consideration. In case of a bad leaver, vested virtual shares are also forfeited.

The payment received by the beneficiary of virtual shares qualifies as a salary/bonus payment in Austria and wage taxes are incurred by the employee. Employee ownership of real shares almost never happens, as. issuing shares to employees below market value would lead to dry income and progressive income tax/social security contributions on the value of the shares.

In addition to that, the transfer of shares in limited liability companies in Austria requires notarization. As a result, each shareholder ends up being added to the cap table, therefore making the cap table long and unattractive for potential institutional investors.

For these practical reasons, employee ownership is scarce.

What’s market right now – Chile
Written by Vicente Valdés and Carolina Stalder of Morales & Besa


In connection with founders, leaver and vesting provisions on venture capital deals are not very common in Chile. In fact, the model documents provided by ACAFI (Chilean Association of Funds Managers) do not contain leaver and vesting provisions. However, since it is common for entrepreneurs in Chile to effect, at some stage, a flip from a Chilean company (usually a Sociedad por Acciones, where the responsibility of shareholders is limited) to Delaware, the UK or the Cayman Islands (mainly for tax reasons and to attract investors), leaver and vesting provisions are becoming relevant.

Based on the above and similarly to the US, where leaver and vesting provisions apply, the founders’ shares are subject to reverse vesting for a period of often four years, which usually lapses monthly, except for a one-year cliff.

During the reverse vesting period, the founders can exercise all rights attached to their shares, such as voting power and dividends, except that (unlike the vesting provisions), it has been common practice (in jurisdictions such as Denmark) to have a lock-up and negative pledge imposed during such period for the respective founder.

As in many jurisdictions, vesting provisions are normally incorporated in the shareholders’ agreement and the definition of ‘bad leaver’ is highly negotiated. The definition of ‘bad leaver’ can contain the events described in the UK section (e.g., criminal offence, fraud) or a serious breach of the employment agreement. Note that if a founder is not a ‘bad leaver’, they will generally be a ‘good leaver’.

If the founder is a ‘bad leaver’ or if he or she voluntarily resigns, the shares (other than to the extent they have already vested) are usually bought back by the company for a price equal to their nominal value.


Like in the US, it is common for companies to grant stock options to employees and/or advisors when the company has attained a meaningful value. Stock options are mostly regulated by the terms of the employment agreement or in a company’s stock option plan.

The vesting schedule of stock options operates similarly to that of the founders (one-year cliff and afterwards monthly vesting over three years). In the event of a termination of the employment agreement (for any cause), non-vested stock options are automatically forfeited. Employees typically have 90 days to exercise their vested options after termination of their employment agreement.

It is also worth noting that tax legislation governing stock options has recently been modified to benefit those employees whose stock options are referred to or provided for in their individual or collective employment agreements (taxes are paid by the employee once shares are sold and not when the stock option is granted or exercised). However, if stock options are regulated outside the relevant individual or collective employment contracts (and are not incorporated in any such contract by reference) and are instead governed by the terms of a company’s incentive plan, taxes are paid by the employee upon exercise of the stock option.

It is not common for employees to be given an opportunity to buy shares outright (i.e. instead of being granted an option to acquire shares under a stock option plan), but there are circumstances when this might occur (for example, when the company is a start-up and the valuation of its shares is still low).

What’s market right now – Denmark
Kasper Kiilsholm Ottesen
, Founding Partner at Highbridge


In Denmark, it is common for entrepreneurs to agree to a reverse vesting schedule in respect of their shares as part of the process of raising venture capital financing.

It is market standard for the shares to vest (reversely) over a period of three to four years, in arrears either monthly, quarterly, or annually. Sometimes, the vesting schedule will partially or fully accelerate upon the occurrence of an exit event. However, there is not a great tradition in Denmark for accelerated vesting at exits, which in those cases mean that the warrants will either simply continue to vest under the new ownership or be cancelled/redeemed subject to a separate agreement as if accelerated, exercised, and purchased as part of the exit.

As in the UK, vesting provisions in Denmark generally distinguish between good and bad leavers. While the details are to some extent contingent on the bargaining power of the parties, founders are generally considered good leavers in line with UK market practice described above, i.e., death, serious illness, retirement, and dismissal without cause.

Most other scenarios will cause the founder to become a bad leaver, most commonly the founder’s own resignation without this being triggered by a breach on the part of the company.

Good leavers are usually allowed to keep their vested shares in full or partially, whereas the unvested shares are subject to an option to purchase at fair market value by the company and/or the remaining founders and/or shareholders at fair market value.

Some schedules – typically in the early stages of a startup’s life – will provide a right to acquire all shares (vested and unvested) at fair market value to provide for an opportunity to replace the leaving founder with a new co-founder.

It is, however, common practice that a leaving founder and the remaining founders as well as the shareholders will engage in negotiations around the number of shares to be retained and the purchase price for those shares that are sold.

For bad leavers, the shares are commonly bought back at nominal value by the company or pro rata amongst the other founders or shareholders. This also applies to the shares already vested.

As in the UK, some deals will introduce a further definition of a ‘grey’ or ‘intermediate’ leaver, often referred to as a ‘no cause leaver’. Usually this is a founder leaving the business after a period of years, e.g., in a scenario where the vesting has been reset in a subsequent funding round, and other than in circumstances where he or she could have been or was dismissed for ‘cause’. These kinds of arrangements can be viewed as a form of ‘loyalty’ bonus and are increasingly common to see on deals.

No cause leavers will most of the time keep/see fair market value for their vested shares and be treated as bad leavers for the unvested part, i.e., have their shares acquired at nominal value.

The leaver mechanics will typically be included in the company’s shareholders’ agreement, and not in the articles of association (or “vedtægter” in Danish) of the company (unlike in the UK).

A lock-up (a restriction on transfer) and negative pledge (a restriction against creating any security interests over the shares) will be imposed during the vesting period for the relevant founder(s).

Varieties of single and double-trigger provisions are still rather rare in Danish vesting schedules although the double-trigger mechanism (termination event and change of control) is seen now and then for C-suite individuals.


It is market practice to grant employees subscription rights (warrants) rather than shares or options under a tax-efficient ESOP program.

These options vest over time, typically with a one-year cliff followed by three to four years of linear vesting. It is common for the ESOP to provide that if an employee is a bad leaver similar to the founder scenarios described above their vested (but unexercised) as well as unvested warrants will be cancelled without compensation.

Good leaver warrant holders will be allowed to keep/see fair market value for their granted warrants regardless of vesting.

Some venture backed companies’ ESOP schedules will be structured as an ‘exit ESOP’ under which the employees will be entitled to a cash settlement in lieu of actual share ownership in the event of an exit (usually a share sale or an IPO).

This is dissimilar to a “phantom share scheme” as known in the UK.

What’s market right now – Estonia
Written by Taavi Kõiv of Hedman Law Firm

Founder vesting (reverse vesting)

In Estonia, founder vesting is commonly included in shareholders’ agreements (or founders’ agreements) for start-up companies.

As is the case in the UK, Germany and other jurisdictions, shares are usually issued to the founders upon incorporation of the company. Therefore, vesting is better thought of as reverse vesting.

To make the leaver mechanics work, the company (and in some rare cases the other shareholders) is /are granted a call option over the founders’ shares. An issue with this type of mechanic in practice is that a company may only acquire up to one-third of its own shares as treasury shares, meaning that the call option may not be able to cover the entire founder shareholding. This is commonly solved by the shareholders’ agreement allowing the company to transfer its right to use the call option to any of the other shareholders.

Current market practice is that reverse vesting takes place monthly over four years with a one-year cliff.  However, the terms vary from deal to deal and are not prescribed by legislation.

Voluntary resignation and termination of the founder’s employment agreement for ‘cause’ usually sees the founder treated as a bad leaver. Bad leavers will have to transfer the shares to the company (or other shareholders) under the call option at no or nominal value (or for a higher purchase price determined by the company).

Non-founder vesting

Non-founder vesting in Estonia is limited to employee incentive programs for persons who are in contractual relationships with the company, typically employees. An employee may be granted an option to acquire the company’s shares or the shares of any group company.

Options are regulated as an exception to the general regulation on fringe benefits. A company does not have to pay income tax on the grant of shares to an employee for so long as the option shares are not issued to the employee within three years of the date of grant).

Issuing shares within three years of the date of grant can be considered a non-business-related expense and the company may incur income tax at 20 per cent of the fair market value of the issued shares.

Generally, new shares are issued to the employee following the vesting period (which is usually longer than the three years).

Shares may also be transferred to the employees from the treasury shares of the company.

What’s market right now – France
Written by Morgan Hunault-Berret and Salim Bencheikh of Villechenon

Leaver mechanisms in France work in a very similar way to those in the UK. The French specifics are as follows.

Corporate officer equity holder vs employee equity holder

The legal regime applicable to leaver provisions depends on whether the holder of the equity subject to the leaver provision is a corporate officer (mostly bound by a mandate agreement) or an employee (bound by an employment contract).

In a nutshell, leaver provisions applied to corporate officers may be freely drafted in terms of classification of leavers and discount applied to the clawed back equity, whereas those applied to employees will need to be cautiously drafted given the constraints triggered by the application of employment and case law.

Founders of venture-backed companies will usually hold the position of CEO, Managing Director, or similar positions and thus be bound, in most cases, by a mandate agreement. Accordingly, reference to corporate officer(s) in this article includes founders of venture-backed companies when they hold such position.

Corporate officers

Vesting schedules vary from three to five years and usually include a one-year cliff of 25%. There is no established practice on the vesting periods that will need to be negotiated between the parties. The current trend would however be to provide for monthly or quarterly vesting periods.

In most transactions, 100% of the equity of the corporate officer is at risk and may be clawed back whether vested or unvested. The classification of leavers may however be freely negotiated and there is, also, a world of possibilities.

A differentiation between bad and good leavers is most common, but intermediate leaver cases may also be provided for.

The definition of bad leaver would include, for example:

  • a resignation of the corporate officer during the first three to five years; or
  • as long as the leaver provision is in force and in effect: any breach by the corporate officer of certain important provisions of the shareholders’ agreement, willful misconduct (faute lourde) or gross negligence (faute grave).

The current trend though takes a more founder friendly approach regarding gross negligence (faute grave) which is classified as a good leaver or intermediate leaver case.

The definition of good leaver includes the other cases of departure including prolonged sickness, death or resignation after three to five years.

The price of the clawed back equity is usually determined linearly depending on:

  • the classification of the considered leaver (bad, intermediate, good);
  • whether the shares are vested or unvested; and
  • the date of the departure.

In practice, prices vary from the:

    • nominal value (or 10% of the market value) for unvested equity in good/intermediate leaver cases; or
    • for bad leaver cases to the market value for vested shares in good or intermediate leaver cases.

The criteria on which the market value is fixed may be determined in the shareholders’ agreement, the valuation of the company in its last fundraising or by an expert in case of disagreement of the parties.


Employment law will apply where leaver provisions involve employees, and this is where we find the hard nut to crack.

French employment law allows disciplinary sanctions on employees but prohibits financial penalties.

Based on this law, employees have attempted to challenge the discount applied to the purchase price of their equity as bad leavers before court arguing that the discount applied to the purchase price is a disguised disciplinary financial penalty and thus prohibited.

French case law is however not entirely fixed and legal doctrine seems divided.

The validity of leaver provisions involving employees is subject to the fulfilment of the following conditions:

  • the leaver provision does not include a classification of the leaver cases;
  • the discount, if any, applied to the clawed back equity is applicable in any case of departure without distinction (the same discount should be applied to the resignation, dismissal or willful misconduct of the employee (faute lourde)); and
  • any dismissal without actual and serious basis (licenciement sans cause réelle et sérieuse) will give employees the right to seek compensation for the damage suffered as a result of the discount applied to the clawed back equity.

There is, however, a grey area in law and covers the circumstances where leaver provisions including a discount is triggered following a disciplinary sanction imposed on the leaver employee.

Case law and legal doctrine are further grey on whether the applicable sanction related to the invalidity of a leaver clause applied to an employee would be:

  • the payment by the employer of the difference between the market value of the clawed back equity and the discounted price paid to the employee in application of the leaver provisions; or
  • the nullity of the whole leaver provision.

To avoid a maximum of risk where a leaver provision is concluded with an employee, a cautious approach would be to have the purchase price of the clawed back equity fixed at market value as determined by an expert (in addition to the absence of classification of leaver cases).

What’s market right now – Germany
Written by Dr. Lorenz Jellinghaus of Lutz Abel

Founder vesting

In Germany ‘founder vesting’ is a widespread mechanic for VC-backed companies and UK market practice is familiar to the German market.

In Germany, all shares are issued and acquired by the founder at once when founding the company and the founder grants a call option (or a similar instrument) to the company or to a third party. As with the UK, vesting is better thought of as reverse vesting.

If the founder leaves the company during the vesting period, the entitled entity/person has the right to exercise its call option. The number of shares the call option applies to is determined by the elapsed time in the vesting period and dependent on whether the founder is a good leaver or a bad leaver.

The terms of the founder vesting are usually incorporated in the shareholders´ agreement.

As in the UK, shares need to be purchased at fair market value for the purposes of German tax law so as to avoid unwanted dry tax charges. Founders therefore are – ideally – issued with all of their shares upon incorporation when there is little to no value in the company.

Non-founder vesting

Non-founder vesting takes place only within the framework of an employee participation programme in which employees are entitled to a cash bonus in the event of an activating event (usually a share sale or an IPO).

The level of these entitlements is based on the value of allocated virtual shares (or phantom stocks) granted to the employee. Those virtual shares are taxed as income upon an activating event, which is not particularly tax efficient.

Looking ahead in Germany

Following criticism of the employee participation model, the German government is currently considering modernising the employee share ownership system in Germany and making equity share ownership economically attractive for employees in the future.

The plan is to tax equity shares only in the event of an activating event, that is when an actual return in cash is possible. Employees would then have to pay a rate of 25% tax on the shares. This is equivalent to the capital gains tax that would also apply, for example, to normal transactions on the stock exchange. A first decision is expected in 2021.

What's market right now – Hong Kong
Written by Katherine U of MinterEllison LLP

In Hong Kong, it is common for a company which is listed or planning to be listed to set up share incentive schemes as a means of rewarding and incentivising not just the founders and employees of the company and its subsidiaries but the consultants, business partners and other third parties who contribute to the growth of the company as well.

Share option schemes are the most common type of incentive schemes used in Hong Kong although many companies now have schemes such as restricted share unit schemes, share award schemes and share purchase schemes in addition to their share option schemes.

Unlike share option schemes which involve the issuance of new shares to the option holders, restricted share unit schemes and share award schemes usually involve the transfer of existing issued shares, or the proceeds of sale thereof, to the holders of the units or awards, and will thus have a different impact on the issued capital and financial position of the relevant companies.

Regardless of the type of scheme used, the vesting of options or awards are usually subject to a vesting schedule of three to five years, often coupled with specific performance targets as well.

There is usually little distinction amongst the different types of incentive schemes in their treatment of good leavers, bad leavers and grey leavers. Companies which have more than one type of share incentive scheme usually treat the good leavers, bad leavers and grey leavers in substantially the same way across the schemes.

If a holder of an option or award becomes a leaver (good, bad or grey alike), the unvested portion of her option or award will usually lapse immediately. One exception provided in some schemes is to allow unvested options or awards to vest immediately upon the death of the holder of such options or awards.

A good leaver (typically someone who leaves by reason of retirement, redundancy, death, ill-health, injury or disability affecting her ability to continue in her role, or termination other than for cause) is usually allowed to exercise her vested but unexercised options or receive her vested award shares or proceeds of sale thereof within a short period of time (e.g. within one month after the date of her departure (and such date is usually defined in the scheme rules)).

If the departure is caused by death, ill-health, injury or disability, the good leaver (or in the case of death, her personal representative(s)) will usually have a longer period (e.g. within a period of 12 to 24 months from the date of departure) to exercise the options or receive the award shares or sale proceeds.

A bad leaver (typically someone who is terminated for cause, guilty of serious misconduct, or convicted of any criminal offence involving her integrity or honesty) will usually see her vested but unexercised options, or vested but not-yet-transferred award shares, forfeited. Nevertheless, it is uncommon for shares which have already been issued or transferred to the bad leaver to be clawed back.

A grey leaver (typically someone who resigns) is treated in a less consistent way by companies than a good leaver or a bad leaver. Some companies treat those who resign the same way as they treat bad leavers and forfeit the vested but unexercised option or vested award shares, while other companies do the opposite and allow those who resign to exercise or take their vested options or awards within a short period time.

What's market right now – India
Written by Vinod Joseph of Argus Partners


Just as in the UK and USA, in India, a departing founder may be considered to be a ‘good leaver’ or a ‘bad leaver’ depending on the reason for departure. It is market practice for companies with VC investments to include such leaver provisions within shareholder agreements – SHAs – or share subscription and shareholder agreements – SSHAs; the requirement is usually for ‘good leavers’ to retain their shares in the company and for ‘bad leavers’ not to do so.

Where there is what is considered to be a material breach of the investment agreements and this would include ‘bad leaver’ type issues, the investors will often have accelerated exit rights such as exit rights with drag along provisions or put options. If the founders leave the company as a ‘bad leaver’ before the investors have exited, this would usually amount to a material breach and such breach would also result in an accelerated exit for the investors. However, it is very rare for exit rights such as drag-along or put options to be enforced in India.

Clauses in the SHA or SSHA that provide for ‘reverse vesting’ of founder shares in case of ‘bad leavers’ are relatively new to the Indian market, though these have now become common. However, these ‘reverse vesting’ clauses have not been tested in Indian courts and it is not possible to predict if ‘reverse vesting’ would be enforced by Indian courts, though theoretically, a ‘suit for specific performance’ to enforce the ‘reverse vesting’ clause is feasible.

The [Indian] Companies Act, 2013 poses the following hurdles to enforcement of a ‘reverse vesting’ clause:

  1. Indian companies cannot hold their own shares in treasury. When a company buys back its own shares (called a “share buyback”) such shares are extinguished.
  2. A “share buyback” by an Indian company is subject to a number of restrictions, the most important of which are as follows:
  3. A company may purchase its own securities only with funds from its free reserves, the securities premium account or the proceeds of the issue of any shares. Further, shares cannot be bought back using proceeds of an earlier issue of the same kind of shares.
  4. A company cannot buy back shares worth more than 25% of the aggregate of its paid up capital and free reserves.
  5. After completion of the share buyback, the ratio of the aggregate of secured and unsecured debts owed by the company cannot be more than twice the paid-up capital and its free reserves.
  6. A company can buyback only fully paid up shares.
  7. A company cannot buyback its shares until a period of one year from the date of the closure of the preceding offer of buyback has elapsed.
  8. When a company, with the approval of a special resolution, offers to buyback its shares, such offer has to be directed to all its shareholders or all shareholders of a particular class. An offer to buyback shares cannot be made to just the founders, unless the founders hold a distinct class of shares.

If the company is unable to buy the founder’s shares, ‘reverse vesting’ will not be implemented and the founder may get to retain the shares in his/her name. Investors may be able to seek other equitable remedies, but there is no existing case law on this matter.


Key employees who are not founders are usually not parties to SHAs or SSHAs. However, it is market practice for an SHA or SSHA to require the company / founders to ensure that key employees execute, as a condition precedent to closing, a new employment contract or ancillary contract which may have provisions for claw-back of shares/stock-options given to the key employees who are ‘bad leavers’. In the case of stock options which have not been exercised, it is relatively easy to cancel or terminate such options and it is market practice for agreements that grant stock options to provide for such cancellation, prior to vesting, if there is material breach by the employee.

However, it is not market practice to require key employees who are not founders, to relinquish shares already held by them, even if they are ‘bad leavers’.

What’s market right now – Ireland
Written by Brendan O'Brien and Eoin Ryan of Walkers Ireland LLP

For both historical reasons and the strong commercial ties between Ireland and the UK, the Irish venture capital and private equity environment is heavily influenced by what is happening in the UK. The summary of the UK position above could, in our view, apply equally to the Irish market. However, unlike the UK, there is no standardised set of investment documents used in Irish VC transactions. The UK-based BVCA standardised documents for early stage VC investment can sometimes be referred to in Ireland but are rarely used on Irish VC deals.

Also, as in the UK, tax is typically the determining factor when deciding the manner in which shares will be issued to employees. The industry and size of the company can also influence the type of equity plan adopted.

Good/bad leaver provisions are standard investor protections with the sale price for the leaver’s shares depending on the reason for departure. Reaching consensus on what constitutes a bad leaver can be the source of much negotiation.

Customary bad-leaver provisions in Ireland include a material breach of the shareholders’ agreement / employment contract, dishonesty / gross misconduct and a conviction for a serious criminal offence / fraud.  A voluntary resignation is more typically treated as a ‘bad leaver’ categorisation.  Typical ‘good leaver’ provisions include retirement (at the normal retirement age), redundancy, death, resignation due to serious illness (unless self-inflicted due to alcohol or substance abuse) or the board of directors deeming the employee to be a ‘good leaver’. A ‘good leaver’ therefore is usually a manager who leaves the company for reasons for which he / she is not responsible.

A third category of ‘intermediate leaver’ is becoming more common, whereby the price received for the shares will not be as punitive as the bad leaver price (typically nominal value / or an agreed discounted price) or as favourable as the good leaver price (typically the fair market value as determined by an independent expert). An ‘intermediate leaver’ is typically a founder/employee who sticks around for an agreed period but voluntarily resigns thereafter.


Generally, some form of vesting schedule is agreed between the parties to mitigate the punitive nature of the leaver provisions. Such provisions are usually incorporated into a shareholders’ agreement. Typically, the vesting of shares begins only after an agreed period (i.e. 12 months).  Often the first year’s shares will vest together at once with the remaining shares vesting monthly/quarterly over the remainder of the vesting period.

Reverse-vesting, as per the UK position, is also common place. The reverse vesting period is typically between 3-4 years. Acceleration of the vesting schedule is commonly agreed when the employee is terminated without cause.


VC investors typically insist on the founders being precluded from selling any shares, unless the investor consents otherwise. In respect of transferees, Irish company law is also prescriptive about how a company can buy back its shares and has broadly similar distributable reserves requirements as in the UK. Stamp duty might also be payable on a share transfer (currently at the rate of 1% of the higher of the market value and the consideration payable for the shares).

A company will need to take care that any ‘bad leaver’ provision is not construed as a penalty by a court of law.  It is therefore important to get all the parties to agree to such a provision as part of the broader agreement.

What’s market right now – Israel
Written by Ariella Dreyfuss, Partner of Barnea Jaffa Lande

In the Israeli start-up world, in an effort to align interests, it is common for the entrepreneurs to agree on a reverse vesting mechanism on their shares in their founders’ agreement.

It is market for the shares to reverse vest over a period of three years, to be released in equal instalments on a monthly or quarterly basis, and for the schedule to fully accelerate on an exit event.

If the founder resigns other than for ‘good reason’, or is terminated for ‘cause’, then she will be able to keep the shares vested to date, and the non-vested shares will be subject to a right of repurchase by the company/remaining founders.

If the founder resigns for ‘good reason’, which may include constructive dismissal, death or incapacity, or if her employment is terminated other than for ‘cause’, the shares will be released from the reverse vesting mechanism.

During the vesting period the founder will be restricted from transferring or pledging her shares.

If the start-up company itself was not a party to the founder’s agreement, or no such reverse vesting agreement is in place, then during the first financing round, the investors will ask the founders to repeat this undertaking to the benefit of the company and in certain cases the investors, particularly if the founders control the company or the board and can therefore unilaterally amend the contract.

Reverse vesting mechanisms are typically codified in contracts, and not in the articles of association of the company (unlike in the UK).

The Israeli Tax Authority may consider a repurchase of shares by the company from a founder as a distribution of a dividend to the other shareholders, which would have tax and corporate law implications for the company. Accordingly, there are customarily mechanisms included in the relevant contracts permitting the company to reclassify the unvested shares into non-voting and non-participating shares, in lieu of repurchasing them.

To reduce the risk that tying the founder’s equity to her engagement by the company might lead the Israeli Tax Authority to conclude that such shares are consideration for the founders’ employment and therefore subject to income tax at a rate of up to 50% (rather than capital gains tax which has a lower tax rate range of 25% – 33%), the reverse vesting mechanism has to meet the following criteria:

  1. it must be agreed in advance and in writing at the time the company was incorporated or soon thereafter, or as a result of a substantial investment in the company (at least 5%);
  2. only the company or other existing shareholders are entitled to buy the forfeited shares, and such sale shall be for no consideration or for their par value;
  3. the relevant shares are ordinary shares, with identical rights to the other ordinary shares in the company; and
  4. but for the reverse vesting mechanism, the gain from the sale of the shares would have been considered a capital gain.

It is market practice to grant employees options (rather than shares) under a tax-efficient program. These options vest over time, typically with a one-year cliff. It is common for the company option plan to provide that if an employee is terminated for cause their vested options will be cancelled.

What’s market right now – Italy
Written by Antonia Verna and Daniel J. Giuliano of Portolano Cavallo

Leaver provisions structured as put-options: when they are valid or not according to Italian case-law

It is common in the Italian market to find leaver provisions amongst the provisions that govern post-investment relationships with founders of venture-backed companies.

In the Italian market, leaver provisions are typically found in shareholders’ agreements or other ancillary agreements.

Occasionally, the parties may attempt to structure leaver provisions using a put and call mechanic. Care must be taken with put options.

Put-options are where the founder has the right to sell upon becoming a leaver at a predetermined price or at a price determined based on a predetermined formula depending on the triggering event.

Put-options, however, may conflict with the Italian Civil Code which states that shareholders cannot be entirely excluded from sharing profits or losses (divieto di patto leonino).

Leading case law agrees, put-options are null and void when they provide for the permanent and total exclusion of a shareholder from sharing the profits or losses.

Rulings from the Italian Supreme Court also state put-options are not valid if they are included in the company’s articles of incorporation.

Law and legislation act so as to restrict put-options from altering the statutory rules governing the relationship between the company and the shareholders.

Leaver provisions included in incentive schemes

Start-ups and small/medium sized businesses in Italy are usually structured as limited liability companies (LLCs).

Many LLCs make use of equity incentive schemes in favor of their employees, directors and independent service providers (and have done so since 2012 when a new regulation on start-ups was introduced).

Under the rules:

  1. LLCs can purchase their own equity, provided it is for the implementation of an incentive scheme (as an exception to the general principle preventing LLCs from carrying out transactions involving their own equity).
  2. There are certain tax advantages associated with the financial instruments or other rights (and options to acquire such instruments and rights) assigned by innovative startups to employees, directors and external staff. For example, subject to certain conditions, financial instruments and other rights acquired by virtue of an incentive scheme do not form part of the assignee’s income for tax and social contribution purposes.
  3. There are tax advantages similar to those mentioned in point (2) above in respect of equity and participative financial instruments assigned by innovative startups to independent providers in consideration of the service or work performed in favor of the company.

The tax advantages stated above in (2) and (3) are only applicable to companies that fall under the definition of ‘innovative startup’. For a company to meet such definition it must meet certain specified criteria including, inter alia:

  • it must not have been established for a period longer than five years; and
  • its main business purpose must be to produce and market high-technology services and products.

What’s market right now – Japan
Written by Yuki Sato of So & Sato


The venture capital industry in Japan has been strongly influenced by the US. However, vesting provisions have not been very common in Japan. Even today, many of the founders’ agreements require the founders to sell all their shares to the remaining founding shareholders once they leave the company.

While the JVCA does not provide any templates specifically dealing with vesting, vesting provisions have become increasingly common.

Since the founders of the company acquire the shares at the time the company is established, the shares are generally subject to reverse vesting. The vesting periods typically range from two to five years. In many cases there is also a one-to-five-years cliff. Founders generally earn their shares on an annual basis. Shorter earning periods are the exception.

Unlike in the UK, vesting provisions are usually not incorporated into the articles of association but into the founders’ or shareholders’ agreement.

Similar to other jurisdictions vesting provisions in Japan generally distinguish between good leavers and bad leavers. While the details largely depend on the bargaining power of the founders, leavers are generally considered good leavers unless one of the circumstances applies that makes them a bad leaver.

For bad leavers the shares are commonly bought back at the nominal value or the initial purchase price. In many cases, this also applies to the shares that are already vested. For good leavers the price is typically set at the price of the last financing round or fair market value. Yet, it is common practice that the leaver and the remaining shareholders engage in negotiations about the purchase price despite the provisions in the founders’ or shareholders’ agreement.


For employees it is more common to offer stock options than shares. This is due to the fact that there are certain tax exemptions for stock options and that they provide more flexibility in case an employee leaves the company. If a company provides shares to (leading) employees, in many cases, the employees must sell their shares to the founders, or a party nominated by the founders at the purchase price. If the shares are subject to a vesting schedule, the schedule is largely in line with that of the founders.

The vesting provisions may either be included in the employment agreement or a separate contract.

What’s market right now – Netherlands
Written by Sjoerd Mol of Benvalor


In the Netherlands, venture capital deal terms tend to follow the UK and US market to a great extent. The overview provided by HLaw above on how leaver and vesting provisions work in the UK largely applies to the Netherlands as well, with a few exceptions.

In the Netherlands, leaver provisions are not set out in the articles of association but in the shareholders’ agreement. The main reason for this is that Dutch law is less flexible for venture capital style articles than it is for shareholders’ agreements. In addition, articles are public which is obviously not the case with a shareholders’ agreement.

As in the UK, leaver triggers in addition to a scenario where the founder is voluntarily resigning are quite common, such as a criminal offence committed by the founder or the founder breaching a restrictive covenant. It is, however, one of those clauses that are heavily debated on many deals.

In the Netherlands, the shareholders’ agreement usually identifies the specific circumstances where founders will be a bad leaver, absent which they will be good leavers. Sometimes there are more than two categories of leavers, such as an added ‘intermediate leaver’, ‘early leaver’ or sometimes a ‘bad performer’. It is usually an ‘in between’ category, not a good leaver, but not as bad as a bad leaver.

If the leaver event is triggered, then the following applies: (i) the founder has to offer its shares to the other shareholders or to the company at a certain valuation; or (ii) the founder has to offer its shares to a trust office foundation (Stichting Administratiekantoor) against the issuance of depository receipts of shares by the foundation (which basically means the founder loses their voting rights and right to attend shareholders meetings but maintains their financial rights).

Bad leavers must offer their shares to the other shareholders (or the company) at the nominal value or at a large discount of the fair market value (something in the range of 50 per cent). Usually, good leavers must offer all of their shares to the other shareholders at fair market value or to a trust office foundation against the issuance of depository receipts of shares as described above. In later stage deals, good leavers may have the right to keep (part of) their shareholdings.

Reverse vesting of founder’s shares is still not as common as it is in the US or UK, although it is more and more becoming the norm. There is usually a lot of resistance against it from founders who prefer – obviously – that their shares are considered fully vested as of day one when an investor steps in. If applied, reverse vesting usually occurs on a monthly basis running for two to five years following completion of the investment. Usually, a percentage of the founder’s shares are excluded from the reverse vesting scheme (so deemed already vested at the time of the transaction), depending on the circumstances, 25 to 50 per cent is not uncommon. An exit will usually trigger full acceleration of the vesting. Double trigger acceleration (as also explained in the above ‘the view from the US’ section) is not common in the Netherlands. This is where vesting is accelerated when there is a change of ownership (first trigger) followed by a termination of employment of the respective employee (second trigger). In the Netherlands, single trigger acceleration is the norm, so an exit or change of ownership alone will cause acceleration of vesting. If no reverse vesting schedule applies, then an early leaver clause is usually included instead to discourage a founder leaving on their own initiative shortly after completion.

The transferees of the founder’s shares that are offered are in most cases the other shareholders rather than the company, because of quite strict Dutch financial assistance rules for financing a buyback. In some cases, the shares first need to be offered to the company and then, if the company does not accept the offer, to the other shareholders (or to the preferred shareholders first). No stamp duty will apply on transfer.


Employees are usually granted share options or stock appreciation rights (‘SARs‘). SARs are contractual rights which entitle the employees to a cash settlement in lieu of actual share ownership in the event of an exit (usually a share sale or an IPO) or dividend payment.

These SARs or options vest over time, typically with a one-year cliff followed by three years of linear, monthly or quarterly, vesting (so four years of vesting in total). It is common to provide that if an employee is a bad leaver, similar to the founder scenarios described above, their vested as well as unvested SARs or options will be cancelled without compensation.

Good leavers will be allowed to keep their vested SARs or options, although in some cases a de-vesting schedule applies, under which the good leaver will gradually lose its SARs or options if the (potential) exit moves further away from the date the employee left the company.

In some cases – typically in the very early stages of a start-up, before a priced round takes place – shares or depository receipts of shares are offered to employees instead of SARs or share options. This can be more favourable from a tax perspective in the Netherlands.

What’s market right now – New Zealand
Written by Lee Bagshaw of Kindrik Partners

The New Zealand start-up and venture capital ecosystem is still evolving when it comes to investment terms, including vesting arrangements. Unlike other jurisdictions, there is a more varied approach taken depending on the stage of the company and the type of investors the company has.


Even before receiving investment, start-ups in New Zealand increasingly put in place founder vesting agreements enabling a repurchase of a founder’s unvested shares in the event he or she ceases to contribute to the business. As employment law in New Zealand is relatively employee friendly, companies are advised to link the forfeiture of unvested shares to a failure by founders to continue making the expected contribution (as defined in the agreement) to the business, rather than relying on a formal termination as an employee.

As in other jurisdictions, on most equity financing rounds involving VC or other institutional investors, vesting provisions are often included in the company’s shareholders’ agreement. In New Zealand, many investment rounds are completed using the NZ Angel Association model documents. These provide that if a founder (i) ceases to be engaged as a contractor or employee; (ii) attempts to transfer any of his or her unvested shares or (iii) materially breaches the shareholders’ agreement, the company can repurchase unvested shares from the defaulting founder for nil.

Bad leaver provisions are seen less commonly in New Zealand than in other jurisdictions. However, the Angel Association model documents do have an option under which vested shares can additionally be bought back by the company from a bad leaver. This includes where the founder leaves the business quickly within a certain period or where the founder is terminated for fraud, a criminal offence or material breach of his or her employment agreement. The buyback price for the vested shares is generally fair market value (as determined by the board) although can be lower or even nil in the case of serious misconduct. In any case, bad leaver provisions are often negotiated, or even removed, from New Zealand investment documents.

Vesting periods for founders in New Zealand can vary, but three or four year periods incorporating a one-year cliff are common. Companies incorporating vesting arrangements should ensure that their company’s constitution expressly permits share buybacks and authority is given by the founder for the buyback under the relevant agreement. A share buyback is a formal procedure under the Companies Act 1993 of New Zealand.


Typically, employees and contractors in New Zealand are incentivised via employee share option schemes, rather than loan-funded or other share schemes, which are no longer tax efficient. Phantom share schemes (under which employees are not issued shares but instead receive units that entitle them to a cash bonus calculated by reference to the value of the company’s shares) are increasingly seen.

Vesting periods are typically three or four years for employees with a one-year cliff, following the US model, but there is perhaps more variation on this in New Zealand with shorter periods seen.

A departing employee would typically forfeit his or her unvested options for nil under the ESOP terms, and can also be required to exercise vested options during a limited period after departure, otherwise, they lapse. ESOPs also sometimes have an expiry period in New Zealand of, for example, seven to ten years.

ESOP schemes do not always include good/bad leaver provisions. Further, the acceleration provisions on an exit of the company for unvested options can vary a lot from partial to full acceleration. Concepts such as ‘double trigger acceleration’ (seen commonly in the US) are rare in New Zealand ESOP documents.

Sometimes New Zealand companies provide for some level of claw-back of vested options in leaver scenarios (as well as unvested), together with shares that have been issued upon exercise of vested options. Where vested options or shares are forfeited, generally the recipient would receive fair market value in compensation.

Finally, share option plans in New Zealand are generally set up in reliance on the applicable exclusion under the Financial Markets Conduct Act 2013 (‘FMCA’) (New Zealand’s securities laws).  New Zealand law requires that companies who offer financial products to give information to investors before they invest (as is the case in most jurisdictions, ESOPs can be excluded from this).  To qualify for this exclusion under the FMCA, the company must meet certain requirements, for example, limiting the number of shares and/or options issued under the scheme in any 12-month period to 10% of the total number of shares on issue.

What’s market right now – Poland
Written by Przemysław Furmaga and Filip Sobociński of Crido


In Polish practice, similarly to the UK, two types of vesting provisions are typically used:

  • ‘Reverse’ (founder) vesting – regarding founders’ shares. In this scenario, in return for the investor’s capital investment, the founders undertake to work for the development of the company, under the pain of losing their current stake in the company’s share capital (or some of it), e.g. if they left before the end of the vesting period. The founders’ shares are usually gradually ‘released’ over time; and
  • ‘Proper’ vesting – a mechanism related to future shares, entitling a designated person (either a founder or a third party) to gradually acquire a company’s shares at a predetermined price and after a certain period (mainly used in incentive programmes).

Irrespective of the vesting option chosen, it is crucial to agree on a target shareholding structure reflecting the position once the vesting has completed (in the form of a cap table). It is also important to agree in advance whether the shares subject to vesting (or other incentive schemes) will come from the existing share pool (at the expense of one of the shareholders) or whether they will be newly issued shares.

In Polish practice, the vast majority of start-ups operate in the form of a limited liability company, and for this reason, any agreements on share transfers must (on pain of being void) be made in writing with notarised signatures.

AoA or SHA?

Similar to the UK, it is common to include vesting mechanisms in the articles of association / statutes (which must be executed in the notarial deed form and submitted to the registry court). However, if the parties wish to keep the relevant provisions confidential, they can be regulated in the shareholders’ agreement.

It must be noted that despite the increasing popularity of digital solutions (e.g., electronic signatures), many activities related to vesting or share transfers require the personal participation of the parties or their representatives: shareholders’ agreements containing provisions on vesting must be executed in the written form with a notarial certification of signatures (exchange of counterparts is allowed), and articles of association or statute of the company must be executed in the notarial deed form (all parties, or their proxies, must be present in front of the notary public).

Leaver mechanisms

Leaver mechanisms in Poland do not differ significantly from those in the UK. Depending on the circumstances, a leaver may lose all or part of his shares or rights to acquire them. Similar to the other jurisdictions, the usual leaver cases are divided into ‘good’ and ‘bad’ leaver cases, with other categories of leavers (e.g. ‘medium/intermediate’) occurring less frequently in practice.

In terms of non-founder vesting, a breach of the terms of the plan will usually result in the loss of all or part of the right to take up/acquire new shares. A potential dispute may concern the assessment of whether the reasons for depriving him of this privilege have occurred.

In the case of founder (‘reverse’) vesting, a breach usually results in the defaulting shareholder being bought out by the others (usually an investor). It is crucial that the purchase price is determined in advance with adequate precision (the indication of ‘market value’ only will not suffice – stipulated mechanism must specify the grounds for calculating the price) so that there is no ambiguity as to the price at which the shareholder will be bought out. Otherwise, the parties run the risk of not being able to enforce such a contract because of the lack of a sufficiently precise price determination.

The other common way to remove a vested shareholder is to redeem his shares – either voluntarily or compulsorily. Compulsory redemption may be carried out without the shareholder’s consent, but only for reasons specified in the articles of association (e.g., a sufficiently defined case of a ‘bad leaver’). Shares must be redeemed for at least their balance sheet value. As a result of the redemption, the participation rights attached to the redeemed shares are extinguished.

Never too secure

An important part of the vesting-related documentation is the mechanisms to secure the rights of the investor to acquire the shares of the defaulting founder.

A common solution in the VC sector in Poland is a call option granted in favour of the investor over part or all the founder’s shares, which can be exercised under certain circumstances. This option is usually secured either by an irrevocable power of attorney from the founder or by an irrevocable offer to sell the shares at a certain price, sometimes also backed up by a contractual penalty.

In addition, a company’s articles of association may provide for a lock-up period or otherwise restrict the ability of shareholders to dispose of their shares. A transfer that does not comply with the articles of association is ineffective towards the company and the other shareholders.

What’s market right now – Russia
Written by Anna Andrusova of Lurye, Chumakov & Partners

In Russia, practice of gradual vesting of shares to founders or key employees is not very common but is gaining popularity. Many companies do not implement incentive programs or equity plans. They reward key employees and founders with cash bonuses in accordance with employment agreements or regulations, which does not stimulate employees in the long term.


In Russia, founders of a company are usually the initial shareholders of the company, and they hold a controlling share in the company. Founders acquire shares at par value. In respect to founders in most cases a reverse-vesting schedule is applied. Generally, vesting period is between 2 and 5 years and vesting of shares takes place on an annual basis.

If a founder leaves the company within a certain period for certain reasons, his / her shares are subject to repurchase. If the business is organized in the form of a limited liability company, the shares are re-purchased not by the company, but by its other shareholders, as the law on limited liability companies allows a company to acquire its shares only in extraordinary cases specified by the law. Meanwhile, the law on joint-stock companies allows a company to purchase no more than 10% of its shares from the distributable profits. However, joint-stock companies are rarely used for organizing business in Russia. The most popular form for organizing business is a limited liability company, which constitute 95% of all commercial companies registered in Russia.

A founder’s equity plan with reverse-vesting schedule is always accompanied by a series of documents, such as a shareholders’ agreement, options to repurchase founders’ shares, document stipulating the terms and conditions of the founder’s equity plan. Articles of association generally do not contain any rules regarding vesting of shares. If the company has a lot of shareholders, a buy-back option may be granted to several shareholders who will purchase the shares of the leaving founder and then distribute such shares in favor of other shareholders.

If a founder leaves the company for cause before the expiration of the vesting period, all his / her shares are usually repurchased at par value. If a founder leaves the company for cause after the end of the vesting period, all his / her shares are usually repurchased at a discount to market value. And, finally, if a founder leaves the company for reasons other than a cause, his / her shares are usually repurchased at market value, or the founder continues to keep the vested portion of his / her shares.

Considering the risk that a leaving founder will no longer be interested in managing a company, most owners of companies prefer to repurchase shares of the leaving founder in full. This preference is primarily due to the fact that particularly important corporate decisions (such as those related to raising additional equity financing) may only be made by all shareholders unanimously (due to the law requirements). If the leaving founder continues to own shares, this could lead to potential voluntarism on his / her part.


Accession of key employees not being founders to equity plans is a complicated procedure because usually non-founders receive the same class of shares as founders and investors. Issuance of different classes of shares is possible only if the company is organized in the form of a joint-stock company (which is not a popular form of business organization). The legislation on limited liability companies does not allow issuance of shares of different classes.

Since key employees, founders, and investors in most cases receive shares of the same class, they need to regulate their relationship regarding managing the company. For this purpose, the founders, investors and key employees enter into a shareholders’ agreement. Usually such shareholders’ agreements include provisions under which key employees, both before and after vesting, do not in fact participate in the management of the company.

The shares of non-founders vest annually. For this purpose, the company has to increase its share capital. Such increase of share capital requires unanimous decision of all current shareholders and shall be notarized (these are requirements of the law), so the establishment of a more frequent vesting schedule incurs additional costs and difficulties. Generally, key employees purchase shares at their par value, and rarely at their market value. Since shares vested to employees are shares “issued” as a result of an increase of share capital, they must be paid up, they may not be granted for free, so, the key employees shall pay at least par value for such shares.

Non-founders also enter into an option agreement in order to enable other shareholders to buy back their shares if they leave the company. The rules for determining the price for buy-back of shares from non-founders are similar to the rules referred to above for determining the price for buy back of shares from founders.

Since shares that are issued in favor of employees grant voting rights (as they are of the same class as shares of the founders and investors) and decisions on some key issues may only be taken unanimously (in accordance with the law), the participation of a non-founder in the company’s capital carries a risk of a corporate conflict. Therefore, companies motivate non-founders with phantom (contractual) shares rather than real shares. Such phantom (contractual) shares provide for employees with the right to receive cash payments as if they were shareholders, but not with the right to vote (as real shares are not issued in such case).

What’s market right now – Singapore
Written by Kyle Lee of WongPartnership LLP


In Singapore, it is typical for founders’ shares to be subject to reverse vesting, with such vesting taking place over three to five years and on a monthly basis with a one-year cliff to start. With the pendulum recently swinging back in favour of investors, we have recently seen asks from investors to extend the cliff period to two years and the monthly vesting to quarterly or even yearly.

Instead of being built into the constitution of the issuing company, market practice is that such vesting provisions tend to be dealt with via contractual agreement either in the shareholders’ agreement or in the employment / founders agreement, given that the constitution is publicly searchable.

Founders may also sometimes bring up commercial reasons to argue that the start date of the reverse vesting should be a point in time prior to the investment round in question.

While we have seen many ways of slicing and dicing the good leaver / bad leaver concept, a more common formulation would be to specify the categories of events which would lead to a departing founder being a deemed a bad leaver, with the good leaver correspondingly being a departing founder who does not fall within such category.

For bad leavers, it is typical that all shares (vested or unvested) are bought back at nominal value, i.e. 1 cent per share or at nominal value for unvested shares and at a specified discount for vested shares. Good leavers on the other hand are typically entitled to keep their vested shares but such vested shares may still be subject to buyback at fair market value while unvested shares are bought back at nominal value.


Typically, employees would be incentivised via the employee share option scheme of the company, which would similarly provide for vesting of the options over time with a cliff period. There may also be performance targets built into the employee share option scheme which would affect the number of options exercisable.

A departing employee would typically forfeit her non-vested portion of the options, while having a specified time-period after departure in which to exercise her vested options.

What’s market right now – Turkey
Written by Özlem Bulut Penezoğlu and Ayşe Burçak Çoğ of Penezoğlu

In Turkey, investors generally perceive venture capital as a financing method that supports technological innovations and projects with high growth potential. The key issues negotiated by the parties involved in the structure are the Founder Leaver Provisions, which are also derived from the principle of freedom of contract recognised in Turkish law.

It should initially be noted that in Turkey, there is no specific regulation governing the exit situations in agreements related to venture capital. Similar to the UK and the US, the framework of exit and leaver provisions is determined through negotiation in the pre-participation process of the venture capital, considering specific circumstances. These provisions are determined within the framework of agreements privately negotiated by the parties and become effective mostly within the scope of Capital Market regulations, Turkish Tax Law, Turkish Commercial Law, Turkish Code of Obligations, and Turkish Labor Law.

In Turkish legislation, as in other jurisdictions, the negotiation of the exit / leaver and remuneration provisions may vary depending on whether the departing party is a founder, shareholder, or key employee (sometimes including different contracts with senior executives). These provisions are generally included in shareholders’ agreements for founders and shareholders, and in employment contracts and/or separate stock option agreements (or phantom stock option agreements) signed for key employees and/or senior executives.

Like performance-based bonuses, phantom option agreements provide benefits to employees if their work reaches certain performance levels. However, this benefit does not grant the right to acquire shares in the company or its affiliates, but financial rights such as dividends related to these shares. Although there are different forms of phantom option agreements, the most preferred one in Turkey is an agreement concluded between the founding shareholder and the employee, promising the employee the payment of a portion of the profit by reference to the value of the relevant shares at the time when the right conferred by the phantom option agreement crystallises.

At this point, it is also important to briefly mention the role of the articles of association of the company. It will be important to amend the articles of association as necessary, in accordance with the parties’ agreement regarding the approval mechanisms for share transfers.

The main objective in negotiating the exit / leaver provisions is to make prior arrangements to avoid any disruption in the venture’s activities at the time of separation. In terms of remuneration provisions, the aim is generally to build stock option plans or other options (such as profit sharing or performance rewards) into the remuneration structure. In particular, these practices have become popular in Turkey in order to motivate and retain key employees of ventures that have the potential for rapid growth but have not yet achieved that momentum. The venture’s current journey, stage, growth potential, market conditions, and bargaining power of the relevant parties are important factors in negotiating these provisions.

The remuneration provisions in shareholders’ agreements and stock option agreements are not necessarily limited to venture shares, but may also apply to the venture’s and/or investor’s affiliates or subsidiaries. It is important to thoroughly analyse the venture, the investor, and the affiliates and subsidiaries in terms of whether they are incorporated as Turkish or foreign companies and to establish them in the most advantageous manner for taxation.

In Turkey, there is generally a reverse vesting arrangement ranging from three to five years for founders and shareholders, while there is a linear (forward-looking) vesting arrangement for employees and senior executives who are engaged either as employees or pursuant to other contractual arrangements. Initially, venture founders and shareholders are provided with a certain percentage of venture shares, and based on predetermined criteria (such as contribution to the venture, achievement of specified key performance indicators, etc.) outlined in the shareholders’ agreement, the founders’ venture shares are either protected or reduced.

As in other jurisdictions, ‘bad leaver’ provisions are included in the shareholders’ agreement. Cases other than those falling under bad leaver provisions, such as departure due to health reasons or voluntary departure after a certain period, are considered as ‘good leaver’ situations. Although the good and bad leaver arrangements can be flexibly regulated under the scope of “contractual freedom”, in practice, the basis of bad leaver situations primarily consists of circumstances that give rise to justifiable termination of the contract by the employer due to “breach of morality and good faith.”

Where a founder or shareholder is classified as a bad leaver, their venture shares are usually repurchased at a discounted price by those who have the right of first refusal for purchasing these shares as provided by legislation and tax regulations, as long as circumstances allow. There are also cases where the repurchase price can decrease to the nominal value in situations permitted by legislation.

For key employees and senior executives engaged under other types of contracts, vesting provisions may be solely based on the achievement of key performance indicators (“KPI”), or solely time-based (“Cliff”), or versions that incorporate both conditions. The provision of KPI and time-based arrangements should be carefully specified in the option agreements. In option agreements that are structured with solely time-based or solely KPI-based arrangements for key employees and other senior executives, an entitlement can be granted before the expiration of the time period or before the fulfillment of the KPI. However, this is not a commonly preferred method for the growth of the venture.

Furthermore, although stock option agreements are regulated separately from employment agreements, they may be subject to the mandatory provisions of Turkish Labor Law as they ultimately constitute contracts signed between key employees and the employer. All provisions under Turkish Labor Law are either relatively mandatory or absolutely mandatory as long as they are in favor of the employee. Courts tend to interpret provisions that are considered relatively mandatory, have loopholes, or are open to interpretation in favour of the employee.

It is also important to mention the tax advantage for employees and other senior executives who acquire shares in a Joint Stock Company with linear (forward-looking) vesting provisions. According to the law, “shares held” for more than two years are exempt from income tax, regardless of the amount of profit arising from their disposal. From a tax law perspective, a Limited Liability Company (“LLC“) and a Joint Stock Company (“JSC”) have similarities, but in Turkey, an LLC is generally preferred as the required founding capital is smaller than JSC.

What’s market right now – UAE
Written by Arjun Ahluwalia and Tim Theroux of Argentum Law

In the UAE, general market practice for private investments is strongly influenced by UK market trends, largely due to the expansive influence of UK-qualified lawyers and the strong business links between the UK and the UAE.

However, we have observed increasing use of US-style investment term sheets and early-stage investment documents adapted for use in the UAE as the early-stage venture community is increasingly influenced by trends emanating from Silicon Valley and as investors with US backgrounds are increasingly influential in the investment community.  For example, the use of US style SAFEs (simple agreements for future equity) to raise money prior to a formal financing round has become commonplace.

In our experience in the UAE, in the VC context, founders’ or key persons’ shares are typically subject to vesting periods ranging from two to four years, with a one-year cliff, and monthly or quarterly vesting thereafter. Individuals who are nominated as later ‘co-founders’ or non-founder ‘key persons’ are often subjected to performance related milestones to trigger vesting of their equity.

In cases where investment is provided by a non-typical VC investor, such as a corporate strategic investor, vesting terms tend to be more lenient; equity typically remains fully vested in the founders, but is subject to more stringent terms on claw-back of the shares and call options at heavily discounted valuations upon the occurrence of typical ‘bad leaver’ events.

‘Termination for cause’ and ‘bad leaver’ vs ‘good leaver’ events are typically heavily negotiated. For example, parties often discuss whether or not to include the full range of UAE criminal offences  (which is broader than the typical range in the UK).

Much of the UK market practice relating to vesting of shares applies to expectations placed on UAE-based founders. However, one key difference from UK practice is that since income tax is not applied in the UAE, concerns related to taxable gains on share options are not relevant unless the founder is tax – resident elsewhere outside the UAE.  This results in much less focus on establishing a ‘fair market value’ of shares at the time a grant of options is made.

Another departure from UK market practice relating to UAE ventures is that share options have historically been granted in vehicles incorporated offshore (such as in Cayman/BVI/Bermuda/Delaware etc.).  This is because many corporate vehicles established in the UAE (whether onshore or in the free zones) historically have not allowed for differentiated share classes nor relative ease in registration of shares.

That is, however, changing with the introduction of new rules and regulations at the Dubai Multi Commodities Centre (DMCC) (a popular free zone).  These rules have introduced more flexible equity features and enabled the incorporation of vehicles, such as special purpose companies, organized in the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market (ADGM). This has allowed founders and investors to structure holdings and share options in a common law-based system.

Given the recent efforts by the free zones generally to encourage business activity due to the continuing effects of the COVID-19 situation, many free zones have offered significant discounts on incorporation packages.  This has encouraged many early-stage ventures seeking investments to reorganise and restructure their corporate structures to align with international best practices (for example, by moving holdings previously onshore or in more archaic free zones to common law type free zones such as the ADGM and DIFC, and implementing time and performance-based vesting agreements for shares held by founders and key persons).

If you would like to discuss leaver provisions on a particular deal or transaction, or if you think we left anything out of this guide, then do please contact us at

The UK aspects of this piece was researched and prepared by Henry Humphreys, Annette Beresford, Jeremy Glover, Nick Westoll and Lucy Ganbold.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice.  Much of the above will no doubt fall out of date and conflict with future law and practice one day. None of the above should be relied upon.  Always seek your own independent professional advice.