The words "good leaver" and "bad leaver" sound like jargon, but they control something very simple: what happens to your shares when you leave the business, and how much you're paid for them. Get this clause wrong, and you're setting yourself up for a brutal argument at the worst possible time. Get it right, and everyone knows where they stand from day one.
What is a good leaver?
There's no fixed legal definition of a "good leaver" – it's whatever you put in your documents – but most UK agreements treat someone as a good leaver if they leave in acceptable circumstances. Typical examples include:
- Retirement agreed with the board
- Redundancy
- Long-term illness or incapacity
- Death
- A mutually agreed departure that isn't contentious
In most cases, good leavers either keep their shares, or are bought out at fair market value, often with some flexibility around whether the remaining shareholders can insist on buying. The idea is to recognise their contribution, not punish them.
What is a bad leaver?
A "bad leaver" is someone who leaves under adverse circumstances – they've done something wrong, or left in a way that harms the business. Common bad leaver triggers include:
- Dismissal for gross misconduct or "cause" (fraud, theft, serious dishonesty)
- Serious breach of contract or the shareholders' agreement
- Serious breach of restrictive covenants (competing, poaching clients or staff)
- Resigning early to join a competitor or during a sensitive period (like an investment round)
- Sometimes, walking away very early without delivering agreed commitments
For bad leavers, the agreement usually forces a transfer of some or all of their shares, often at a discount to fair market value, or even at cost or nominal value in extreme cases. The logic is to protect the company and remaining shareholders, not to reward someone who has damaged the business.
How are leaver shares typically valued?
Most modern agreements use a "fair value" mechanism as a base. In practice that means:
- An independent firm of accountants is appointed as valuer
- They value the company and the leaver's shares on an agreed basis – often:
- assuming a going concern,
- valuing each share as a pro-rata slice (no minority discount or control premium),
- taking into account relevant circumstances at the valuation date
Typical treatments then look like this:
- Good leaver: fair value for their shares; sometimes with an option to keep them instead
- Bad leaver: fair value with a discount, or the lower of fair value and the original issue price; in some schemes, forfeiture of unvested shares
Time bands and discounts – how "punitive" should you be?
Many founder-level agreements apply heavier discounts in the early years and ease off as time goes on. A typical pattern across UK commentary is:
- Year 0–1: bad leaver gets at or near cost / nominal value
- Years 1–3: bad leaver gets a percentage of fair value (for example, 25–75%)
- After a certain point: either full fair value or a modest discount
That reflects reality: the business is most vulnerable to someone leaving badly in the early years, when everyone's sweat equity is still going in. Over-punitive forfeiture for long-serving shareholders is more likely to feel unfair and be challenged.
Time-banded discounts (e.g. cost in year one, stepped percentages up to 100% after a few years) are a founder-friendly midpoint: strong enough to deter bad behaviour early, without being so draconian that no one sensible will sign.
Where should leaver provisions sit – articles or shareholders' agreement?
Leaver provisions can sit in the articles, the shareholders' agreement, or both:
- Articles: bind everyone automatically and are enforceable as part of the company constitution, but they are public at Companies House
- Shareholders' agreement: private and more flexible, but purely contractual – you must make sure everyone is signed up and that the articles don't conflict
Many firms suggest putting core compulsory transfer mechanics in the articles (so they bind transferees) and the more tailored good/bad leaver detail in the shareholders' agreement. Either way, clarity and internal consistency are key.
What should you decide before you sign?
For a small founder team, the key decisions are:
- What exactly makes someone a good leaver vs a bad leaver?
- Are you comfortable treating death and serious illness as automatic good-leaver events?
- Do you want good leavers to be able to keep their shares, or must they sell?
- What time bands and discount percentages feel firm but fair for bad leavers?
- Do you want a cross-option and life cover in place to fund a buy-out on death?
These are not things you want to negotiate in the middle of a health crisis or a disciplinary. Decide them now, while relations are good.
Next steps
For straightforward founder companies, our shareholders' agreement template includes clear, time-banded good leaver / bad leaver clauses you can actually explain to each other. Get the Shareholders' Agreement Pack →
If your cap table is more complex, talk to your solicitor about bespoke leaver provisions.
Related Templates for Founders
Setting up with co-founders? Get our Shareholders' Agreement Pack – SHA, cross-option agreement, deed of adherence and how-to guides for UK startups.