What the clause is actually for
Someone leaves. They hold shares, or options which have partly vested. The question is immediate and unavoidable: what happens to them?
Without a leaver provision the answer is uncomfortable. Shares are property. Nobody can take them back without a mechanism, so a founder who leaves in year three keeps their holding indefinitely, contributing nothing and diluting everyone who stays. Options are contractual, so they usually lapse, but only if somebody drafted what happens when they do.
A leaver provision answers the question in advance. A good leaver departs on terms which entitle them to keep the value they built - shares purchased at fair value, vested options preserved or exercisable within a window. A bad leaver forfeits it, either at the price they originally paid or, for unvested options, entirely.
Neither phrase has a meaning in law. There is no statutory definition and no default the court will imply. They mean precisely what your documents define them to mean.
Where the line usually sits
Most documents follow a broadly similar shape, which is worth knowing because deviations from it are usually deliberate and worth asking about.
- Good leaver. Death, serious illness or permanent incapacity, retirement at an agreed age, redundancy, and departure by mutual agreement. The uniting idea is that the person did not choose to go, or went on terms everybody accepted.
- Bad leaver. Resignation before an agreed date, dismissal for cause or gross misconduct, and breach of restrictive covenants - going to a competitor, taking clients, or taking staff.
- The middle. Resignation after a qualifying period, or dismissal without cause. Some documents create an intermediate category with partial value; others force it into one of the two.
The single most contested item is voluntary resignation. Treating every resignation as bad leaving is common, defensible, and harsh - it means someone who gave four good years and then left for family reasons is treated like someone who walked out to a competitor. A time-based taper, where resignation is bad leaving before year two and good leaving after year four, resolves most of that argument before it starts.
Who decides, and why it matters more than the definitions
Almost every leaver clause contains a line giving the board discretion to treat a bad leaver as a good leaver. It reads as humane flexibility and it is the most reliable source of dispute in the whole document.
The reason is structural. By the time the question arises, the board is usually the people the leaver has fallen out with. Asking them to exercise discretion in favour of someone they have just removed is asking a great deal, and a discretion which is never exercised is worse than no discretion at all - it creates an expectation, and then a grievance.
If discretion stays in, it is worth being specific about who exercises it. A decision by the board excluding any director who is themselves a leaver, or by shareholders holding a stated majority, or by an independent third party, all remove the obvious objection. Silence achieves the opposite.
Getting it right, before it is needed
Three things which are cheap now and expensive later.
First, make the documents agree. Leaver provisions typically appear in the share scheme rules and in the shareholders’ agreement, drafted at different times by different people. Where they conflict, you have created the argument rather than settled it.
Second, define the valuation mechanism, not just the entitlement. "Fair value" without a process for arriving at it converts a clean clause into an expert determination nobody budgeted for. Name the valuer, or the method, or both.
Third, deal with the timing. A right to be bought out is worth much less if the company can take five years to pay, and much more than the company can afford if payment is due immediately. Instalments, with interest and security, are usually the honest answer.
Frequently asked questions
What is the difference between a good leaver and a bad leaver?
A good leaver leaves on terms which let them keep the value in their shares or vested options, typically through a purchase at fair value. A bad leaver forfeits some or all of it, often at the price originally paid. Neither term has a statutory meaning - the definitions in your own documents are the whole of the law on it.
Is a good leaver bad leaver clause legally enforceable?
Generally yes. These are contractual provisions in articles of association, a shareholders’ agreement or share scheme rules, and courts will enforce them as written. Enforcement can be challenged where a clause operates as a penalty or where the process was not properly followed, which is why the mechanism matters as much as the definitions.
Does resigning make you a bad leaver?
It depends entirely on your documents. Many treat any voluntary resignation as bad leaving, which is common but harsh on long-serving people. Others apply a time-based taper so resignation is bad leaving early on and good leaving after a qualifying period. Read the definition rather than assuming.
Can the board decide to treat a bad leaver as a good leaver?
Only if the documents give them that discretion, and most do. The practical difficulty is that the board is often the other side of the disagreement, so a discretion granted in general terms is frequently a source of dispute. Specifying who exercises it, and excluding anyone with a conflict, avoids most of that.
Settle it while everyone still agrees
Leaver provisions cost very little to draft properly and a great deal to argue about afterwards. Silva puts them into share schemes and shareholders’ agreements as a fixed-fee piece of work.