What exactly are good leaver / bad leaver clauses ?

Are you the founder of a company with several shareholders, other founders and/or investors? Are you wondering what will happen to your shares if you stop your professional involvement with the company?

A priori, the answer is simple: the end of your professional involvement with the company will have no effect on your shares, unless you resort to any withdrawal or exclusion procedures possibly provided for in the articles of association or initiate legal proceedings.

However, a company’s shareholders remain free to provide a leaver clause, usually in a shareholders’ agreement, to deal with this situation. More commonly known as the ‘good leaver/bad leaver’ clause, which organises what happens to the shares of a founder, or any other active shareholder for that matter – i.e. any shareholder whose main professional activity is carried out within the company – if his/her collaboration with the company comes to an end.

Technically, this clause provides for a purchase option on the founder’s shares exercisable at the end of his/her professional collaboration with the company. The founder is then obliged to sell all or part of his shares to the beneficiaries of the purchase option who notify their intention to exercise the option.

The end of the collaboration may be either voluntarily notified by the company or the founder or established by the board of directors due to external circumstances such as illness or death.

The ‘good leaver / bad Leaver’ clause must respond to the following three questions:

1. who are the beneficiaries of the purchase option, i.e. who can buy the shares of the leaving founder? Is there an order of preference between shareholders (e.g. priority for other active shareholders and/or investors)? Can the company acquire them?
2. how many of the leaving founder’s shares can be bought by the beneficiaries? Given the circumstances, could the outgoing founder retain some of his shares and become a ‘passive’ shareholder?
3. At what price can the founder’s shares be bought? Can a founder receive market value for his shares, or do the circumstances of his departure justify a sanction?

Because these clauses combine these different variables, their practical impact is not always easy to grasp. To make this more concrete, we have developed a good / bad leaver simulator on our website. By entering a few parameters, you can visualise how different departure scenarios may affect the number of shares repurchased and their price.

This clause is in favour of both passive shareholders, investors, and shareholders who remain active in the company, particularly the remaining founders.

The Good Leaver / Bad Leaver clause establishes clear rights and obligations concerning the shares of a departing shareholder, ensuring transparency in the event of their exit from the company. By defining the terms under which a shareholder leaves – whether voluntarily, due to misconduct, or under other circumstances – this clause helps prevent disputes and safeguards the company’s stability. Given that founder conflicts are a leading cause of startup failure, implementing such a provision provides a structured framework that protects the business and facilitates continuity even after the departure of a key stakeholder.

Since this clause is purely contractual, the parties have significant flexibility to tailor the terms of a founder’s departure according to their specific needs and agreements.

At Beyond, we help you find the right balance between the interests of the founder, who has devoted his time to developing the project, and those of the other remaining shareholders (active or investors).

Frequently asked questions

What happens by default if a founder leaves the company without a leaver clause?

Without a good leaver/bad leaver clause, a founder’s departure has no effect on their shareholding: they remain a shareholder unless a specific withdrawal, exclusion procedure, or legal action applies. This is exactly the gap the clause fills.

What three questions must a good leaver/bad leaver clause answer?

A well-drafted leaver clause addresses who can purchase the shares, how many shares are involved, and at what price. Any gaps will make the clause difficult if not impossible to enforce.

What mechanism does the clause set up?

It typically creates a call option allowing one or more designated persons, such as the company or the remaining shareholders, to acquire some or all of the departing founder’s shares under pre-agreed conditions.

Why is this clause considered essential for a startup?

It helps ensure that the shareholding structure remains aligned with the people who are actively contributing to the startup. If a founder or key shareholder leaves, a leaver clause sets out in advance what happens to their shares, reducing the risk of disputes, avoiding a significant stake remaining in the hands of someone who is no longer involved, and giving investors greater comfort that the ownership structure will remain stable and aligned with the startup’s long-term interests.

Are the terms of the clause standardised or negotiable?

They are entirely contractual and therefore entirely negotiable. The appropriate terms will depend on both the company’s situation and the circumstances of the persons concerned. Parties can therefore adapt as they please, provided that the mechanism is clearly set out in the agreement.