Departure classifications for equity retention rules
Good leaver and bad leaver are classifications used in shareholders' agreements and option plans to decide what happens to a departing person's equity. A good leaver typically includes someone who resigns for legitimate reasons, is made redundant, retires, or leaves due to illness. A bad leaver typically includes someone dismissed for gross misconduct, fraud, or serious breach of contract, and these classifications interact directly with any reverse vesting schedule already in place.
| Leaver type | Typical circumstances | Typical outcome |
|---|---|---|
| Good leaver | Redundancy, ill health, mutual agreement, sometimes ordinary resignation after a minimum period | Keeps all vested shares; unvested shares often forfeited or bought back at fair value |
| Bad leaver | Gross misconduct, fraud, serious breach of restrictive covenants, competing with the company | May forfeit both unvested and, in some agreements, vested shares, often at nominal value |
| Intermediate / neutral leaver | Voluntary resignation without cause, before an agreed minimum tenure | Terms vary; sometimes treated as bad leaver for unvested shares only |
Determining share value for leaver repurchases
The buyback price for forfeited shares usually depends on leaver status. Good leavers are commonly bought out at fair market value for vested shares, determined by an independent valuation or the price of the last funding round. Bad leavers are more commonly bought out at the lower of cost or nominal value, even for shares that had already vested, as a deterrent against serious misconduct, regardless of how far along the vesting schedule they were.
Definitions and buyback prices are negotiated and vary by agreement. Always read the specific shareholders' agreement or plan rules rather than assuming a market standard applies, particularly when negotiating founder equity terms at incorporation.
Negotiating leaver definitions and buyback terms
- Get leaver definitions clarified and narrowed during negotiation, since vague wording like 'at the board's discretion' creates uncertainty.
- Check whether ordinary resignation is treated as good or bad leaver, since this varies significantly between agreements.
- Understand the valuation method used for any buyback, since fair value and nominal value can differ enormously.
- Consider whether partial good leaver treatment applies if someone leaves after a long tenure but without a formal trigger like redundancy.
Questions on leaver classification outcomes
- Is resigning voluntarily always bad leaver treatment?
- Not necessarily. Many agreements treat voluntary resignation after a reasonable tenure as good leaver, but this depends entirely on the specific contract terms.
- Can bad leaver status affect already vested shares?
- Yes, in many agreements, particularly for serious misconduct, which is why the definitions and triggers matter so much during negotiation.
- Who decides if someone is a good or bad leaver?
- Usually the board or majority shareholders, applying the definitions set out in the shareholders' agreement, sometimes subject to dispute resolution procedures.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.