Good leaver, bad leaver: what these clauses mean for UK founders

What the terms actually mean

Good leaver and bad leaver provisions sit in a company’s articles of association or shareholders’ agreement. They set out what happens to someone’s shares if they stop working for the business, and crucially, how those shares get valued and who can buy them back.

The basic idea is simple. If you leave for a reason the other shareholders consider acceptable, you are a good leaver and you generally keep more value. If you leave for a reason they consider unacceptable, you are a bad leaver and you typically get less, sometimes close to nothing beyond what you originally paid for the shares.

This is distinct from vesting schedules, which govern how much equity you have earned over time. Leaver provisions govern what happens to whatever equity you hold, vested or not, at the point you exit the business. The two mechanisms often interact, but they are separate clauses doing separate jobs.

Good leaver: the friendlier outcome

Being classed a good leaver usually applies in situations such as death, serious illness or incapacity, redundancy in some structures, or an agreed, amicable departure such as retirement. In these cases the departing shareholder is typically allowed to keep their vested shares, or to sell them back to the company or other shareholders at a fair market value, often determined by an independent valuer or a pre-agreed formula.

Some agreements distinguish between vested and unvested shares even within the good leaver category, letting the departing founder keep only what has vested and forfeit the rest. The exact treatment depends entirely on how the specific agreement is drafted, so there is no single standard outcome.

Bad leaver: the harsher outcome

Bad leaver status is generally triggered by resignation without good reason, dismissal for cause, breach of contract, or conduct that damages the company, such as gross misconduct or setting up a competing business. The consequences are usually punitive by design. A bad leaver might be forced to sell shares back at the lower of cost or nominal value, meaning they walk away with little more than what they originally paid, regardless of how much the company has grown in value since.

Some agreements include a middle category, sometimes called an intermediate or partial leaver, where the outcome sits between the two extremes depending on the circumstances of departure. This gives boards some discretion rather than a strict binary split.

Why investors push for these clauses

From an investor’s perspective, leaver provisions protect the company and its remaining shareholders from a founder or key employee leaving early, taking a large equity stake with them, and contributing nothing further to the business. Venture capital investors in particular will usually insist on robust bad leaver provisions as a condition of investment, because they are effectively backing the founding team as much as the idea. If a founder can walk away six months after a funding round with a full slice of equity intact, that undermines the alignment investors are paying for.

This is why these clauses are negotiated early, usually at the point of a priced funding round, and why founders should read them as carefully as they read valuation and control terms in a term sheet.

What founders should watch for

The definitions matter enormously. Who decides whether a departure counts as good or bad leaver, and is that decision subject to board discretion, or is it based on fixed, objective criteria written into the agreement? Discretionary clauses can leave a departing founder exposed if the remaining board, which may now be investor-controlled, has an incentive to classify a departure unfavourably.

Founders should also check how share value is calculated for both categories, whether there is an independent valuation mechanism, whether there are time limits on when a repurchase must happen, and whether the clause interacts with any vesting or cliff provisions already in place. It is also worth checking whether garden leave, notice periods or restrictive covenants are bundled into the same clause, since these affect what you can and cannot do after leaving.

Because these provisions can materially affect a founder’s personal financial outcome, and because tax treatment of share buybacks and disposals can be complex, it is sensible to get independent legal and tax advice before signing any agreement containing them, rather than relying on a term sheet summary.

The practical takeaway

Good leaver and bad leaver clauses are not boilerplate. They decide, in advance, how much of the value a founder has helped build they get to keep if things end badly, whether through illness, disagreement or dismissal. Founders should negotiate the definitions, the discretion involved and the valuation mechanism at the point of investment, not after a dispute has already started.