Leaver clauses in a start-up: A small guide

There’s a lot of talk in the startup world about leaver clauses, but many people don’t know what they are or why they’re important. Startups often have more to lose than larger companies when an employee leaves because they typically have fewer resources and are more reliant on key personnel. That’s why it’s important for startups to have leaver clauses in place.

In this article, we’ll take a closer look at leaver clauses, including what they are and why startups need them. We’ll also provide some tips on how to draft leaver clauses that will protect your startup while still being fair to your employees.

What are leaver clauses?

Leaver clauses are terms and conditions that apply when an employee leaves a company. They can cover things like confidentiality, competition, and intellectual property.

For startups, leaver clauses can be important in protecting their business interests. For example, a startup may want to include a clause prohibiting an employee from starting a competing business. Or, a startup may want to include a clause requiring an employee to keep confidential information about the business secret.

There is a distinction to be made between good and bad leavers when discussing leaver clauses. A good leaver is an employee who leaves the company on good terms, such as for retirement or to take another job. These leavers are usually able to sell their shares at market value.

A bad leaver is an employee who is fired due to bad performance, breaching the shareholders' agreement, gross misconduct within the company, or any sort of fraud.

In general, bad leavers will have more restrictive leaver clauses than good leavers. This is because bad leavers are more likely to take company secrets or start a competing business. As such, bad leaver provisions can have a draconian impact on those affected by them, like obliging them to sell their shares at nominal value.

Leaver clauses can be controversial, and some employees may feel that they are unfair. However, it is important to remember that startups are generally small businesses with limited resources. As such, they need to take steps to protect their interests and ensure their long-term viability.

Why do startups have leaver clauses?

Startups typically have more to lose than larger companies when an employee leaves because they typically have fewer resources and are more reliant on key personnel. That’s why it’s important for startups to have leaver clauses in place.

Leaver clauses can protect a startup in several ways. For example, a clause prohibiting an employee from starting a competing business can help to protect the startup’s unique business model. Or, a clause requiring an employee to keep confidential information about the business secret can help to prevent company secrets from being leaked.

While leaver clauses can be controversial, they are often necessary for startups in order to protect their interests. Without leaver clauses, a startup may be at risk of losing key personnel or having its business secrets exposed.

What are some of the most common leaver clauses?

The most common leaver clauses are those relating to confidentiality, competition, and intellectual property. Confidentiality clauses seek to protect a company's confidential information.

We've collected some of the most common examples below:

1. Non-competition clause:

This clause prohibits an employee from starting a competing business or working for a competitor.

2. Intellectual property clause:

This clause ensures that any invention or work created by an employee while at the company belongs to the company.

3. Confidentiality clause:

This clause prohibits an employee from disclosing confidential information about the company.

4. Non-solicitation clause:

This clause prohibits an employee from soliciting customers or employees of the company.

5. Garden leave clause:

This clause allows a company to put an employee on paid leave for a period of time after they resign. This allows the company to protect its interests and prevent the employee from starting a competing business.

Tips on drafting leaver clauses that will protect your startup while still being fair to your employees.

Startups should be aware of the importance of leaver clauses in protecting their business interests. If a startup includes leaver clauses in its contracts, it is important to make sure that these clauses are fair and reasonable. Employees may be resistant to leaver clauses, so it is important to explain why they are necessary. It is important to strike a balance between protecting your startup's interests and being fair to your employees.

The following tips can help you achieve this balance:

1. Make sure that the clauses are necessary to protect your business interests.

Though leaver clauses are important, they should only be used when necessary. Including too many or too restrictive clauses can make it harder to attract and retain talented employees. When drafting leaver clauses, startups should focus on protecting their most important interests while still allowing employees the freedom to move on to new opportunities.

The goal here should be to not include clauses simply to punish employees who leave. That's not only mean-spirited, but it's also likely to backfire and make people even more determined to leave or start working against you. Instead, focus on protecting your company's legitimate interests.

2. Be reasonable in the scope of the clauses.

While it is important to have these clauses in place, it is also important to be reasonable in their scope. For example, a clause that prohibits an employee from ever working in their field again is likely to be seen as excessive and unenforceable. It is important to strike a balance between protecting the company's interests and respecting the rights of the employees.

The leaver clauses should be clearly stated in the employment contract so that there is no misunderstanding about what is expected of the employees.

3. Make sure that the clauses are legally enforceable.

In the event that an employee does leave and violate one of the clauses, your startup will need to be able to prove in court that the clause was indeed enforceable.

One way to do this is to make sure that the clause is very specific as to what activities are prohibited. For example, rather than simply stating that an employee cannot compete with the company, the clause could specify that the employee cannot engage in any activity that would directly or indirectly compete with the company's business.

Another way to make sure that a leaver clause is legally enforceable is to include a "liquidated damages" provision. This provision specifies the amount of money that the employee would owe the company if they did violate the clause. This amount should be carefully calculated to make sure it is not so high as to be considered unenforceable, but it should also be high enough to deter the employee from violating the clause.

4. Explain the clauses to your employees and give them a chance to negotiate if they feel that the terms are unfair.

Leaver clauses are important because they protect a startup's interests when an employee leaves the company. These clauses can cover things like confidentiality, competition, share vesting, and intellectual property. It is important to explain the clauses to your employees and give them a chance to discuss if they feel that the terms are unfair. By doing so, you can ensure that your startup is protected while also being fair to your employees.

5. Consult with a lawyer to ensure that your leaver clauses are airtight.

It is important to consult with a lawyer to ensure that your leaver clauses are airtight. A lawyer can help you to determine which clauses are necessary and which ones might be unfair to employees. They can also help you to negotiate with employees if they feel that the clauses are unfair.

What are some of the challenges with leaver clauses?

Leaver clauses can be controversial, and employees may resist them. The main challenges with leaver clauses are that they may be unfair to employees and they may be difficult to enforce. For example, an employee may argue that a non-competition clause is unfair because it prevents them from working in their chosen field. Or, an employer may find it difficult to prove that an employee has breached a confidentiality clause.

Another challenge with leaver clauses is that they may not be enforceable in some jurisdictions. For example, in the Netherlands, non-competition clauses will become unenforceable in the near future. This means that startups need to be careful when drafting leaver clauses, and they should consult with a lawyer to make sure that the clauses are legally enforceable.

Conclusion

Leaver clauses are important for startups because they can protect a company's confidential information, prevent employees from starting competing businesses, and ensure that employees do not unfairly profit from inventions or other work done while at the company. However, leaver clauses can be controversial, and employees may resist them.

Despite these challenges, leaver clauses can be an important tool for startups to protect their business interests. If you are a startup, make sure that you understand the challenges and benefits of leaver clauses before including them in your contracts.

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