Why “Market Standard” Clauses Rarely Mean What Founders Think
By Clarence Tan
1. Introduction
(a) There is a phrase that appears in almost every transaction involving founders — whether it is a shareholders’ agreement, a term sheet, or a share purchase agreement. The phrase is: “don’t worry, it’s market standard.” It is offered with the best of intentions. But “market standard” tells you very little about what a clause will actually mean for you, in your company, in your specific circumstances. It describes how a clause is typically drafted. It says nothing about how it will operate in practice, who it was designed to protect, or what happens when something goes wrong.
(b) This article examines seven clauses that are routinely described as market standard — good leaver and bad leaver provisions, restraint of trade clauses, material adverse change clauses, reserved matters, tag-along and drag-along rights, liquidation preferences, and anti-dilution provisions — and explains what founders should understand before accepting them without negotiation. It also addresses a point that often goes unspoken: that even Singapore’s own model agreements, widely used as a market reference, are a starting point rather than a settled answer.
2. What “Market Standard” Actually Means — and What It Doesn’t
(a) When a lawyer or investor describes a clause as market standard, they are usually making a descriptive observation: that the clause, in broadly its current form, appears frequently in comparable transactions in this market. In Singapore and across the region, “market” typically means deals of a similar stage, sector, and investor profile.
(b) That observation may be accurate. But it does not answer the more important questions a founder should be asking: What does this clause actually require of me? Under what circumstances will it be triggered? Who drafted the original template, and whose interests did they have in mind? And has anyone tested this clause in a dispute?
(c) The honest answer is that most market standard clauses originate from templates developed by, or for, the party with the most negotiating leverage — which in early-stage transactions is usually the investor, and in M&A transactions is usually the buyer. Over time, those templates become normalised. They circulate, get lightly amended, and eventually acquire the patina of neutrality that the phrase “market standard” confers.
(d) In Singapore, the Venture Capital Investment Model Agreements — VIMA 2.0, developed by the Singapore Academy of Law and the Singapore Venture & Private Capital Association — are widely used as a market reference for early-stage financing terms. VIMA is a genuinely useful resource, and it is more balanced than many investor-generated templates. But VIMA itself states that its documents are a starting point, and that terms should be tailored to the specific transaction and parties. Founders who are told “this is market standard, we’re just using VIMA” should understand that VIMA is a template with options — and that the choices made within those options can materially affect their position.
(e) None of this makes market standard clauses unfair by definition. Many of them serve legitimate purposes, and understanding those purposes is the first step to negotiating them sensibly. But founders who accept them without scrutiny often find — sometimes years later — that the clause they signed means something quite different from what they assumed.
3. Good Leaver and Bad Leaver Provisions
(a) Few clauses cause more friction after the fact than good leaver / bad leaver provisions, and few are more casually described as standard at the point of signing.
(b) The basic concept is straightforward: if a founder or key employee leaves the company, the treatment of their shares (or options) depends on the circumstances of their departure. A “good leaver” — someone who leaves for acceptable reasons, such as illness, redundancy, or mutual agreement — typically receives better treatment than a “bad leaver,” who might forfeit unvested shares entirely or be required to transfer them at a significantly reduced price.
(c) What founders often do not appreciate is how narrowly “good leaver” tends to be defined in practice, and how broad the residual “bad leaver” category can be. Consider a founder who, after three years of building the business, reaches a point where the relationship with the investor-appointed board has broken down irretrievably. He decides to resign. Under many standard templates, that resignation — regardless of what prompted it — makes him a bad leaver. The emotional and commercial circumstances are irrelevant. What matters is the contractual classification. His unvested shares are forfeited, and his vested shares may be bought back at nominal value. Four years of equity building can be materially unwound in a clause that took ten minutes to agree.
(d) The price mechanism deserves equal attention. Bad leaver shares are commonly valued at the lower of cost or fair market value, or in some cases at a nominal amount. For a founder who has spent years building the business, the financial consequences can be substantial.
(e) These provisions are not inherently unreasonable — they serve a genuine purpose in aligning founder incentives with the long-term interests of the company. But the definitions matter enormously, and they are negotiable. The categories of good leaver and bad leaver, the price at which shares are bought back in each case, and the circumstances that fall in between — these are all points that can and should be discussed before signing.
4. Restraint of Trade and Non-Compete Clauses
(a) Restraint of trade clauses — prohibiting a departing founder or seller from competing with the business for a defined period — are almost universally described as market standard. And in a narrow sense, they are: it would be unusual for a shareholders’ agreement or share purchase agreement not to include one.
(b) What varies considerably, however, is the scope, duration, and geographic reach of the restraint. These differences are not cosmetic. A clause that restricts a founder from working in “any business that competes, directly or indirectly, with the company” for two years across Southeast Asia is a very different proposition from one that restricts them from soliciting the company’s specific clients for twelve months. A founder who signs the former without reading it carefully may find, after departure, that they cannot join a broadly adjacent industry — or start their next company — without risking a claim.
(c) In Singapore, restraints of trade are enforceable only to the extent that they go no further than is reasonably necessary to protect a legitimate business interest. Courts will not enforce a clause simply because both parties agreed to it — if the restraint is too wide, a court may decline to enforce it at all, or read it down to a narrower scope. This means that an overly broad clause does not necessarily offer the protection the investor or buyer intended, and may leave the founder in a state of uncertainty about what they are and are not permitted to do.
(d) The practical advice is not to resist these clauses — in many transactions, a reasonable restraint is entirely appropriate. It is to read them carefully, understand what they prohibit in concrete terms, and negotiate the scope to something that reflects the actual competitive concerns rather than a template drafted for a different business in a different market.
5. Material Adverse Change Clauses
(a) Material adverse change (MAC) clauses — sometimes called material adverse effect clauses — appear in most M&A agreements and, with increasing frequency, in investment documentation. They give one party (usually the buyer or investor) the right to walk away from a transaction if a significant adverse change occurs between signing and completion.
(b) The phrase “material adverse change” sounds clear enough. In practice, it is one of the most heavily contested areas of commercial litigation in major jurisdictions, precisely because what counts as “material” and what counts as “adverse” are not self-defining.
(c) Standard MAC clauses typically exclude certain categories of change from triggering the right to exit — general economic downturns, industry-wide conditions, changes in law or regulation, and sometimes even pandemics or acts of God. The negotiation is usually about what falls inside and outside those carve-outs, and how company-specific a change needs to be before it qualifies.
(d) For founders on the sell side of a transaction, or companies receiving investment, the concern is that a broadly drafted MAC clause gives the other party a low-cost exit option that they can invoke in circumstances of market uncertainty. For buyers or investors, the concern is the opposite: that a narrowly drafted clause leaves them committed to a transaction even where something fundamental has shifted.
(e) Neither position is unreasonable. What matters is that both parties understand, at the point of signing, which risks each of them is carrying through to completion — and that the drafting reflects that shared understanding accurately.
6. Reserved Matters
(a) Reserved matters clauses — which require shareholder or investor consent before the company can take certain actions — are a standard feature of most investment agreements. They exist to give minority investors meaningful protection over decisions that could affect the value of their investment or fundamentally alter the nature of the business.
(b) In principle, this is sensible. Where the clause becomes problematic for founders is when the list of reserved matters is drafted so broadly that it effectively gives investors a veto over routine commercial decisions.
(c) Common examples include clauses that require investor consent to enter into contracts above a certain value, change the nature of the business, hire or dismiss senior employees, or approve annual budgets. At early stages, where investor and founder interests are broadly aligned, this may not cause practical difficulty. As the company grows, or as the relationship with investors becomes more complex, a broadly drafted reserved matters clause can become a genuine operational constraint.
(d) The concern is compounded by the fact that reserved matter thresholds — the consent percentage required to approve or block a decision — can also shift across funding rounds in ways that are not always apparent at the time of signing. A founder who assumed they had a workable relationship with their investor base may find, after a new round, that the dynamics have changed in ways the original documentation permitted but no one clearly articulated.
(e) Reserved matters are negotiable, and the negotiation is usually about scope rather than existence. Founders should approach this clause with a clear view of what decisions they genuinely need to make quickly, and ensure the clause does not inadvertently capture those.
7. Tag-Along and Drag-Along Rights
(a) Tag-along and drag-along rights are frequently explained to founders in a sentence or two — tag-along lets minority investors sell alongside you; drag-along lets majority shareholders compel minorities to sell. Both are described as standard, and both are broadly accurate as summary descriptions. The difficulty is in the detail.
(b) Tag-along rights, for instance, do not always operate on the same economic terms as the majority sale. Some clauses allow tag-along holders to participate at the same price, but on different terms regarding representations, warranties, or indemnities. A founder who assumes that tag-along means “same deal, same price” may be surprised to find that the minority investor’s participation materially changes the shape of the transaction — or, in some cases, deters the acquirer entirely.
(c) Drag-along rights raise different concerns. A drag provision that can be triggered by a relatively small majority, or that does not require a minimum price threshold, gives early investors or majority shareholders significant power to force a sale at a time or price that a founder may not consider optimal. The inclusion of a floor price — or a requirement that the drag can only be exercised after a certain period — is a reasonable ask in most circumstances, and one that is often overlooked in the initial negotiation.
(d) Both clauses are legitimate tools in a well-functioning shareholders’ agreement. Understanding how they interact with your specific shareholding, and at what point they become exercisable, is more useful than accepting them at face value because they are standard.
8. Liquidation Preference
(a) Liquidation preference is, in many respects, the clause where the gap between what founders assume and what the document says is widest.
(b) The basic concept is that investors receive their money back (or a multiple of it) before the proceeds of a sale or liquidation are distributed to ordinary shareholders — which typically means founders. Current market data suggests that the headline preference has become increasingly founder-friendly: recent reports indicate that the substantial majority of venture rounds now use a 1x non-participating preference, meaning the investor gets their investment back first, and the remainder is distributed to all shareholders pro-rata. This is a meaningfully better outcome for founders than a participating preference or a preference multiple above 1x.
(c) However, founders should not read favourable headline economics as a signal that governance terms have similarly relaxed. Data from the same period shows that investor protective provisions — veto rights over key decisions — remain present in the overwhelming majority of deals. The lesson is that the preference structure and the governance structure are separate negotiations, and a founder-friendly liquidation preference can coexist with investor consent rights that significantly constrain day-to-day management.
(d) The clause also becomes significantly more complex where participating preferences or preference multiples above 1x do appear. A participating preference allows investors to take their return and then participate in the residual distribution as if they had converted to ordinary shares. Depending on the preference multiple and the exit price, this can leave founders with a materially smaller share of the proceeds than the headline equity percentages would suggest.
(e) Illustrating this with numbers can be clarifying. Consider a company that raises $5 million at a $15 million pre-money valuation, giving the investor a 25% stake. If the company is sold for $20 million and the investor holds a 1.5x participating preference, the investor receives $7.5 million off the top, and then participates in the remaining $12.5 million pro-rata — receiving a further $3.125 million. Total investor proceeds: approximately $10.6 million on a $5 million investment. Total founder proceeds: the remainder. The headline equity percentage of 25% tells you very little about how exit proceeds will actually be divided.
(f) When reviewing liquidation preference terms, founders should look at both the preference multiple and whether the preference is participating or non-participating. A 1x non-participating preference is materially different from a 1.5x participating one — even if both are described as standard.
9. Anti-Dilution Provisions
(a) Anti-dilution provisions are among the most consequential clauses in any investment agreement, and among the least understood by founders at the time of signing. They are almost always described as standard. The description is not wrong — they are standard. What varies significantly, however, is the type of anti-dilution protection, and the difference between types can be substantial.
(b) Anti-dilution provisions are triggered when a company raises a subsequent round at a lower valuation than the previous one — what is commonly called a down round. When this happens, the conversion ratio of the investor’s preference shares is adjusted to compensate for the reduced price. The investor effectively receives more ordinary shares on conversion than their original investment would have entitled them to. The cost of that adjustment is borne by the founders and other ordinary shareholders, whose stakes are diluted.
(c) The two main formulas are full ratchet and weighted average. Full ratchet is the more aggressive: if a single share is issued at a lower price, the investor’s entire holding is repriced to that lower level, regardless of how small the down round was. Broad-based weighted average is more commonly used and more moderate: the adjustment takes into account the size of the down round relative to the total share capital, so a small down round produces a smaller adjustment. The difference in dilution to founders between the two formulas can be significant, particularly where the down round is substantial.
(d) This is not a theoretical concern. The funding environment across Southeast Asia in recent years has seen a meaningful increase in down rounds, and in the post-2022 funding correction, many companies that raised at elevated valuations subsequently found themselves needing capital at lower ones. Founders who had not focused on the anti-dilution formula at the time of their earlier round often found themselves significantly diluted when the down round occurred.
(e) Anti-dilution provisions are negotiable, and the negotiation is usually about formula rather than existence. Founders should understand which formula applies to their investment, and model the dilution impact under a down round scenario before signing.
10. A Note on Negotiation
(a) None of the clauses discussed above are inherently unreasonable, and pushing back on them does not mean being difficult or inexperienced. The most productive negotiations are usually those where both parties understand what a clause is designed to achieve, and agree on drafting that serves that purpose without inadvertently capturing circumstances that neither side intended.
(b) Founders who approach these conversations with a clear understanding of what each clause actually says — rather than what they have been told it means — are better placed to negotiate effectively. In practice, this means identifying, before the negotiation begins, the two or three provisions that matter most to you given your specific circumstances, and focusing your energy there rather than attempting to renegotiate every clause. Investors expect some pushback on key terms; what they respond to less well is unfocused resistance across the board.
(c) It is also worth remembering that the negotiation of these clauses takes place when the relationship between founders and investors is at its most constructive — before the money is in and before any of the pressure points that these clauses are designed to address have arisen. That is precisely the right time to have a clear-eyed conversation about what the documentation actually says. It is considerably harder to have that conversation later.
(d) If any of the clauses discussed in this article appear in your current documentation and you would like to understand how they operate in your specific context, we are happy to assist.
This article is intended for general informational purposes only and does not constitute legal advice. Readers should seek professional legal advice in respect of their specific circumstances.
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