Dead equity, departing co-founders and cap table clean-up before Series A
Category: InsightsWhy standard 4-year vesting can create problems when a Dutch startup takes longer to reach Series A or exit
Four-year founder vesting can work well at incorporation. It creates commitment, protects the company if a founder leaves early and gives investors comfort that the founding team is still economically aligned.
But the problem often appears later. If a co-founder leaves around year three or four, that founder may already be largely or fully vested, while the company is still far from Series A, profitability or exit. The remaining founders may then have to create most of the future value while a departed founder continues to hold a significant equity stake.
For Dutch startups, this is not only a cap table issue. It is a legal implementation issue. Founder vesting, leaver provisions, repurchase rights and cap table clean-up must work under Dutch BV documentation and share transfer mechanics.
This article connects to Venture Capital Insights, Founder Vesting and Leaver Provisions in Startups and Cap Table Adjustments in Dutch Startups and Scale-ups.
The problem: past contribution versus future execution
A departing founder may have made a real contribution. The issue is not that this person deserves nothing. The issue is whether the retained equity stake still reflects the balance between past contribution and future execution risk.
If the company still needs years of product development, fundraising, hiring, commercial traction and investor reporting, a large passive founder stake can become difficult to explain. It may reduce the remaining founders’ upside, complicate the option pool and make the cap table less attractive to new investors.
Investors do not only look at legal ownership. They look at incentives. If the active founders are carrying the business while a departed founder still holds a large percentage, the cap table may need to be addressed before a priced round.
Reverse vesting and leaver provisions
The standard legal answer is reverse vesting combined with leaver provisions.
Under reverse vesting, the founder may hold the shares from the start, but part of those shares remains subject to a transfer or repurchase obligation if the founder leaves. Leaver provisions then determine what happens on departure: how many shares must be transferred, who can acquire them and at what price.
In a Dutch BV, this must be properly documented. The shareholders’ agreement should set out the vesting schedule, leaver categories, transfer obligation, valuation or repurchase price, call option and any power of attorney. The articles of association and transfer restrictions should also be checked. If Dutch BV shares are actually transferred, a Dutch notarial deed will usually be required.
A leaver clause is useful only if it can be implemented when the founder actually leaves.
The year-three and year-four problem
Founder vesting often works clearly when someone leaves early. If a founder leaves after six months or one year, the unvested portion is usually significant.
The harder case is departure around year three or four. By then, most of the shares may have vested. But the company may still be in the most difficult phase: not yet fundable at scale, not yet exit-ready and still dependent on the remaining founders.
This is why startups should consider whether four-year vesting is enough. Possible solutions include longer vesting, milestone-based vesting, additional repurchase rights before Series A, or a cap table clean-up mechanism that can be triggered before a priced round.
The right solution depends on the company’s stage, founder roles, funding route and investor expectations.
Possible solutions in Dutch startup documentation
A Dutch startup can address this issue in several ways.
One option is longer or staged vesting. A four-year vesting period can be combined with additional retention or milestone-based conditions, for example linked to a priced round, product launch, revenue target or other agreed milestone.
Another option is a leaver-based repurchase right. The company, the other founders or certain shareholders may receive the right to acquire part of the departing founder’s shares if the founder leaves before a financing round or agreed milestone.
A third option is a founder reallocation mechanism. Part of the departing founder’s equity can be made available for the remaining founders, management or employee participation pool.
A fourth option is a settlement at departure. This may combine share transfer, release, IP confirmation, confidentiality, non-disparagement, advisory role and possibly a cash payment. In a Dutch BV, this should be handled carefully and consistently with the shareholders’ agreement and articles.
Creative structures require caution
A more creative solution may be to align incentives rather than simply cut ties. For example, the company could participate in the departing founder’s new venture, while the departing founder retains a reduced or adjusted stake in the existing company.
That may sound commercially attractive, but it is not a standard fix. For a Dutch BV, the board must consider whether the arrangement is in the company’s interest. Investor consent, valuation, related-party issues, use of company cash, tax, governance and future investor optics may all matter.
A creative founder settlement should therefore be reviewed as a related-party and corporate-benefit issue, not just as a handshake solution.
Practical conclusion
The question is not whether four-year vesting is “market standard”. The question is whether the vesting and leaver structure still works if a founder leaves before the startup is fundable, saleable or operationally mature.
For Dutch startups, this is not just a spreadsheet issue. The shareholders’ agreement, leaver provisions, articles, powers of attorney and notarial transfer mechanics must work together. A clean cap table before Series A is much easier to achieve if the founder departure scenario has been addressed before the split happens.
FAQ
Is four-year founder vesting always enough?
Not necessarily. It may work at incorporation, but can be too short if the startup needs many more years to reach Series A, profitability or exit.
What is dead equity?
Dead equity is a shareholding that is no longer linked to active contribution, future execution risk or ongoing operational involvement.
Can a Dutch startup force a departing founder to transfer shares?
Only if the legal documents support it. The shareholders’ agreement, articles, leaver provisions and transfer mechanics must be reviewed.
Does a transfer of Dutch BV shares require a notary?
Usually yes. A transfer of shares in a Dutch BV normally requires a Dutch notarial deed.
When should founders address this?
Preferably before incorporation or before the first serious financing round. It is much harder to negotiate when a founder has already left.
About Dirk de Waard
Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises founders, startups, investors and management teams on Dutch venture capital, founder vesting, shareholders’ agreements, leaver provisions, cap table clean-up and Dutch BV implementation.
ViottaLaw is Dirk’s personal insights platform. Legal services are provided through Venture Lawyers.
Need to review founder vesting or leaver provisions?
Founder vesting should protect the company, the active founders and future investability. That requires more than a standard vesting schedule.
Dirk de Waard advises Dutch startups and investors on founder vesting, leaver provisions and cap table clean-up before financing rounds. Contact Dirk at dirk.dewaard@viottalaw.com to review whether the documentation works if a founder leaves.
