Repurchase Options and Valuation Formulas for Departed Co Founder Shares
Co-founder share repurchases hinge on precise leaver triggers, statutory solvency compliance, and formulaic valuation terms to preserve capital.
Good Leaver Bad Leaver
Meaning
Contractual classifications in shareholder agreements determine how equity is treated when a founder or executive departs the company. The good leaver bad leaver framework dictates whether a departing shareholder can retain their vested shares or must sell them back at a steep discount. This distinction aligns executive behavior with long-term company performance and governance standards.
Good Leaver
Departures resulting from death, illness, or redundant positions usually classify the individual as a good leaver. In these scenarios, the company allows the departing person to keep their vested shares or repurchases them at the current fair market value. This ensures fair treatment for founders and employees who must leave the company due to factors beyond their control, preserving their hard-earned equity.
Bad Leaver
Termination for cause, theft, material breach of contract, or voluntary departure within a short period after funding designates the individual as a bad leaver. When this designation is applied, the company holds the right to reclaim both vested and unvested shares at par value or a nominal sum. This punitive structure discourages early abandonment of the business and protects the remaining team from the disruption of a key member leaving on poor terms.
Investors and founders spend significant legal effort negotiating the exact boundaries of these definitions in the shareholders agreement to avoid arbitrary forfeiture of equity.
Operational Incentive
Clarity in departure terms maintains stability within the executive team. It enforces a high standard of professional conduct and encourages founders to remain committed through the critical growth phases of the business.