Vesting Schedules Written for the Co Founder Who Leaves Early
Structure reverse vesting with nominal price repurchase rights and thirty day section 83b election deadlines to secure equity during early co-founder exits.
Good Leaver
Meaning
Employee equity provisions define the conditions under which a departing staff member or founder is permitted to retain their vested shares or receive a fair price. A good leaver is a classification used in shareholding agreements to describe a person who exits a company under honorable or unavoidable circumstances. These circumstances typically include retirement, redundancy, permanent disability, or death, as well as leaving for reasons that do not involve a breach of contract or misconduct.
This term applies when a shareholder who is also an employee or a director departs and the company must decide the fate of their equity stake. The classification is important because it allows the individual to keep their vested shares or to sell them back to the company at the full fair market value. It stops being relevant once the buyout process is completed or the departing member is legally confirmed as a bad leaver.
This distinction is a standard feature of venture capital and private equity deals designed to protect the interests of committed founders and key staff.
Departure Classification
The specific reasons for a person’s exit are carefully examined to determine if they meet the criteria of a good leaver as defined in the articles of association or the shareholders’ agreement. This process often involves the board of directors reviewing the performance and the conduct of the individual during their tenure. While some categories like death or disability are clearly defined, other reasons such as resignation or mutual agreement may require more negotiation.
The agreement may also include a catch all provision that allows the board to designate any departing member as a good leaver at their discretion. This flexibility is useful for maintaining positive relationships with former employees who may still have an interest in the success of the company. A clear definition of these terms before a departure occurs helps to prevent legal disputes and ensures a smoother transition for the organization.
The board’s decision is usually final and binding on the departing member.
Equity Retention
Once a person is classified as a good leaver, the focus shifts to how their shares will be managed after they are no longer with the firm. In most cases, a good leaver is permitted to keep all the shares that have already vested according to their original schedule. The company may still have a right of first refusal, which means the departing member must offer their shares to the other shareholders before selling them to an outsider.
This arrangement allows the individual to benefit from any future increase in the company’s value, even though they are no longer contributing to its daily operations. However, the company may also have an option to buy back the shares at a price that is fair to both parties. This ensures that the equity remains in the hands of those who are actively involved in the business while still compensating the person who is leaving.
The retention of equity is the primary benefit of being classified as a good leaver.
Valuation Adjustment
The price at which a good leaver’s shares are repurchased is a critical point of negotiation in many shareholder agreements. Unlike a bad leaver, who might be forced to sell their shares at the original purchase price or a discount, a good leaver is usually entitled to the fair market value. This value is determined by an independent appraiser or by a formula specified in the agreement, such as a multiple of the company’s earnings.
The goal is to provide the departing member with a fair return on their investment and their work for the company. This payment may be made in a single lump sum or through a series of installments over several years. The final settlement of this payment marks the end of the individual’s formal relationship with the company and the completion of the good leaver process.
This mechanism ensures that the company can reallocate its equity to new team members without being burdened by the high cost of a bad leaver dispute. The final price paid for the shares is the ultimate resolution of the departing member’s stake in the business.