Squad overwatch reaction

If your soldier gets gravely wounded in a mission, there is a chance that the soldier gets shaken. This chance is 20/25/25/30% for the four difficulties.

What is gravely wounded? It means that the recovery time is more than 168 Hours (336 on Legendary) - this is determined at the end of the mission.

How is recovery time determined? Based on the lowest HP percentage at any point in the mission, a number is generated within certain limits. There are four "buckets": up to 20%, 21-50%, 51-75%, 76+%.

Example, your Soldier has 10 HP and takes 6 Damage, which brings him down to 40% health. At the end of the mission, the game looks in the 21-50% bucket to see the range of how long recovery takes and picks a random number from that. If that random number is more than 168 hours (336 on legendary), you're gravely wounded and the game rolls if you're shaken.

Note that the source of damage doesn't play into it, and neither does healing. The game records the lowest your HP ever was. E.g., 10 health, take 6 damage, heal 4 damage, take 3 more damage, heal 4 damage -> Even though you end the mission with 9 HP, the game records that you were down to 4 HP, which is 40% of 10. That percentage is the ONLY thing that counts.

I do note that the spread between best and worst recover time is MASSIVE. For example, a single point of damage (the 76%+ bucket) on Rookie difficulty puts your Soldier out of commission for 5 to 25 days - completely random.

For more technical details, I dug into the source code here.

Bonus Answer: If you recover from being shaken, you get a permanent increase to Will (4 to 13 points) and can't be shaken again - it's like Vaccination.

So, two part answer. First, Overwatch is triggered by moving more than 1 tile within the overwatcher's line of sight in a single move. You can move 1 tile without triggering overwatch, and you can move 1 tile twice (as part of two actions) without triggering overwatch. If you only spend 1 tile to move out of line of sight, you can continue your move unhindered.

As near as I can tell from looking at the SDK, overwatch shots will not benefit from cover, because they interrupt the move action, and the first part of the movement action removes current cover. (Though they don't count as flanked, either) There is also the standard overwatch hit % penalty of .7 (vs. moving enemies) and .6 (vs. dashing enemies).