Good leaver, bad leaver — what the clauses really mean
Nothing in an equity package matters more, or gets read less, than the leaver provisions. They answer one question: if you stop working for the company, what happens to your shares? The answer ranges from "you keep everything at market value" to "you hand everything back for a pound" — and the difference is drafting, not luck.
The basic machinery
Most PE-backed companies' articles of association contain compulsory transfer provisions: when you cease employment, the company (or the other shareholders) can require you to sell your shares back. The price you get depends on which leaver category you fall into:
- Good leaver — typically death, serious ill health, retirement at an agreed age, or redundancy. Good leavers usually receive market value for their shares, and often keep the vested portion's full economics.
- Bad leaver — typically dismissal for cause, breach of restrictive covenants, and — in tougher drafting — voluntary resignation. Bad leavers often receive the lower of cost and market value, sometimes for the entire holding, vested or not.
- Intermediate leaver — many modern documents add a middle category (sometimes "early leaver"): market value on the vested portion, cost on the unvested portion.
Where the traps sit
- Resignation as a bad-leaver event. This is the clause that surprises people most. In some documents, leaving for a better job makes you a bad leaver — years of vested equity repurchased at what you paid for it.
- Discretion clauses. Many documents let the board upgrade a leaver's treatment at its discretion. That's genuinely useful — but discretion to upgrade is not a right to be upgraded.
- Vesting versus leaving. "Vested" doesn't automatically mean "safe". In some drafting, bad-leaver treatment applies to vested shares too. The interaction between the vesting schedule and the leaver definitions is exactly where a careful read pays.
- Timing around an exit. Leaving shortly before a sale can be dramatically different from leaving shortly after. Some documents contain look-back provisions; some negotiations add leaver protection once a sale process starts.
What's worth doing about it
First, know your own definitions — they're in the articles of association and sometimes a shareholders' agreement, not usually in your employment contract. Second, model the outcomes: what does each leaver category produce at today's value, and at a plausible exit value? Seeing the numbers side by side turns an abstract clause into a concrete negotiating point. Third, if the drafting is unusually tough, that's a conversation for a solicitor who works on management equity — the market has norms, and documents can be renegotiated at refinancings and new investment rounds.
FAQ
Can I lose shares I've already vested?
Under some drafting, yes — bad-leaver provisions can apply the cost-price repurchase to vested shares as well as unvested ones. Whether yours do is a question your articles of association answer precisely.
Is redundancy usually good-leaver treatment?
Commonly, yes — redundancy typically appears in the good-leaver definition. But definitions vary, and what matters is the text in your documents, not the market norm.
Who decides which category I'm in?
Usually the board, applying the definitions in the articles — often with discretion to treat a leaver more generously than the default. If a categorisation looks wrong against the written definitions, that's a legal question worth taking to an adviser promptly, because compulsory transfer timelines can be short.