Good Leaver / Bad Leaver
Good leaver and bad leaver clauses define how a departing employee's unvested and vested equity is treated based on why they left.
What Are Good Leaver / Bad Leaver Clauses?
Good leaver and bad leaver clauses are contractual provisions in shareholders’ agreements, option plans, and employment contracts that determine what happens to an employee’s equity — both vested and unvested — when they leave the company.
The classification of how someone leaves — voluntarily, involuntarily, for good reasons or bad — dictates whether they keep, lose, or must sell back their equity.
The Two Categories
Good Leaver
A good leaver is typically someone who departs for reasons beyond their control or by mutual agreement:
- Made redundant or laid off
- Serious illness or disability
- Death (with equity passing to estate)
- Retirement at standard age
- Constructive dismissal (forced out unfairly)
- Mutual agreement with the company
Outcome for good leavers: Usually retain their vested equity at fair market value and may receive some credit for unvested equity on a pro-rated basis.
Bad Leaver
A bad leaver is typically someone who leaves in circumstances the company deems unacceptable:
- Voluntary resignation
- Termination for cause (gross misconduct, fraud, breach of duty)
- Violation of non-compete or non-solicitation clauses
- Material breach of employment contract
Outcome for bad leavers: Typically forfeit all unvested equity. Vested equity may also be forfeited or required to be sold back at nominal value (often the original strike price rather than fair market value).
Why These Clauses Exist
The purpose is to align long-term incentives:
| Without clauses | With clauses |
|---|---|
| Employee resigns after 6 months but keeps 25% equity | Resigned employee returns unvested equity |
| Bad actor retains full stake after firing | Misconduct triggers forfeiture |
| Investors carry a non-contributing shareholder | Cap table stays clean |
Implications for Founders
Founders are not immune. Investor term sheets often include reverse vesting on founder shares, treating early-departing founders as bad leavers. A co-founder who leaves in year one could be forced to sell the majority of their stake back at cost — a crucial protection for remaining founders and investors.
Key Takeaway
Good leaver and bad leaver clauses are fundamental to a clean, fair equity structure. Negotiate the definitions carefully — especially what qualifies as a “good” departure and how vested shares are valued in each scenario. These provisions protect both the company and team members when inevitable departures happen.
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