Startup Super School
Intermediate Equity

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.

Published March 10, 2026
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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 clausesWith clauses
Employee resigns after 6 months but keeps 25% equityResigned employee returns unvested equity
Bad actor retains full stake after firingMisconduct triggers forfeiture
Investors carry a non-contributing shareholderCap 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.

Frequently Asked Questions

What is a good leaver clause?
A good leaver clause protects departing employees who leave for acceptable reasons - such as redundancy, serious illness, retirement, or mutual agreement. Under good leaver provisions, the employee typically retains some or all of their vested equity and may receive fair market value for it. The specific rights depend on the shareholders' agreement or option plan rules.
What is a bad leaver clause?
A bad leaver clause applies when an employee leaves under circumstances deemed unacceptable - such as resignation, gross misconduct, or breach of contract. Bad leavers typically forfeit all unvested equity and may lose some or all of their vested equity as well, often forced to sell it back to the company at nominal value (e.g., the strike price paid).
Why do good leaver / bad leaver clauses matter for founders?
For founders, these clauses are critical in co-founder agreements and investor term sheets. Investors often require that founders be subject to reverse vesting - meaning if a founder leaves early (as a bad leaver), they must sell their unvested shares back at cost. This protects remaining founders and investors from a departing co-founder retaining a large equity stake while contributing nothing.
Are good leaver / bad leaver clauses negotiable?
Yes, they are negotiable, and the definitions matter enormously. Founders and employees should carefully negotiate what counts as 'good' or 'bad' leaving, particularly the treatment of vested shares, the valuation mechanism for buying back shares, and whether intermediate categories (sometimes called 'intermediate leavers') are recognized. Always have a lawyer review these provisions before signing.
team equity vesting legal employment founders

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