What are the good and bad leaver provisions?
When an employee leaves the company, according to the shareholder agreement, they have to transfer their shares to the company or the shareholders. The “good leaver” and “bad leaver” events are clauses that specify how much the employee will receive for their shares. If the employee is defined as a “good leaver” they will receive the market value of their shares. The market value is, in this case, defined as the worth of the shares on the day the employee leaves.
Shares come in handy in many situations:
1) you can divide the initial share pool between the Co-Founders,
2) issue some additional shares for your investors,
3) offer shares from the option pool as motivators to your key employees.
The term “Good and Bad Leaver Event” becomes interesting when an employee, who has stock options at a company, leaves.
Why are the Bad and Good Leaver Provisions important?
The Shareholder Agreement clearly indicates that when an employee, co-founder or director decides to leave, they have to transfer their shares to the remaining shareholders of the company. “Transfering” in this case stands for the company “buying back” these shares from the leaving employee, and the Bad and Good Leaver Provisions (discussed when the employee receives the shares and included in the contract), specify for what price. This clause usually states that the “good leavers” get the market (current) value of their shares, while the “bad leavers” get the nominal value of their shares (the value at the time when they received the shares).
Who is a Good and Bad Leaver?
The terms are actually really flexible, the signing parties can freely define the differences in the contract. Generally, the “Good and Bad Leaver” clause should comprise the reasons of why the employee leaves the company. For instance, a bad leaver could be someone, who
- simply quits because of a higher salary or better opportunities elsewhere
- starts to work at a competitor
- breaches the contract, e.g. the NDA
- gets fired for lack of duty fulfillment.
In comparison, a good leaver is someone, who leaves because of
- health reasons, death
- constructive dismissal
- or leaves but stays as a consultant.
Those are some general rules, but the “Bad and Good Leaver Provisions” can be adapted to different needs and have to be discussed in detail for the contract. Some events can be controversial to discuss, this is why it’s important to define all the different conditions beforehand, not just with the employees, but also among co-founders, in order to align expectations.
There are some best practices in the industry. As a compromise usually, the founders of the company cannot be bad leavers and will always get the market value for their shares. Or your shareholders could also negotiate a certain amount of shares paid with the nominal value, and the other half with the market price, while the exact volume could be determined by the time at which the shareholder spent with the company.
Now you know that the “Bad and Good Leaver Provisions” are in the Shareholder Agreement, stating the price of specific shares the leaving employee is entitled to get in order to transfer the shares to the company. The details are quite flexible as you can see in our examples and best practices above.
If you have any questions or you simply want to express your opinion, feel free to leave a comment below!
(This article by no means replaces official legal consultancy. It serves as a guide – for concrete legal advice please reach out to a lawyer.)