Compulsory Transfer Provisions: Understanding Leaver Scenarios and Vesting Schedules in Startup Equity Negotiations

October 2023
Region: Europe

Josh Lodge explains that a compulsory transfer provision is common in private companies, tying shareholders' right to hold shares to their continued employment by the business.

He delves into the distinction between good and bad leavers, discussing how vesting schedules, typically applied to good leavers, add complexity by determining the price for their shares based on the circumstances of departure. The rationale for these provisions lies in incentivizing shareholders' alignment with business growth, but founders aim to narrow down scenarios resulting in share forfeiture, preferring the default position to be good leaver status. He advises founders to focus on limiting bad leaver scenarios to specific, controllable events, emphasizing the importance of alignment and incentivization in early-stage businesses.

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