Good Leaver or Bad Leaver: What Happens to a Founder’s Shares When They Leave? 

Key takeaways

• Why they matter: Leaver provisions stop a departing founder or employee from keeping equity that was meant to reward future work. Investors will almost always expect them. 

• Definitions drive value: “Good” and “bad” leaver are not legal terms. The definitions, any intermediate category and the vesting schedule decide how much a leaver keeps and what they are paid. 

• Enforceability: After Cavendish v Makdessi and Lee v GSquare, well-drafted leaver provisions triggered by someone leaving, rather than by a breach, are unlikely to be struck down as penalties. 

• Mechanics and tax: A buyback must comply with the Companies Act 2006, and shares held by employees and directors raise income tax issues that need to be dealt with when the shares are issued. 

Founders and early employees usually receive shares on the strength of what they will do for the business, not what they have already done. If a co-founder leaves after a year and keeps a quarter of the company, the people who stay will be building value for someone who is no longer contributing, and the next investor will notice. Leaver provisions deal with that risk by setting out, in advance, what happens to a person’s shares when they stop working for the company. 

This article explains how leaver provisions work, how good and bad leavers are usually defined, how the courts approach their enforceability and the practical points that are often overlooked. 

Where are leaver provisions found?

Leaver provisions usually sit in the articles of association, and are often repeated in the shareholders’ agreement. Putting them in the articles matters, because the articles bind every shareholder, including people who acquire shares later (section 33 of the Companies Act 2006). Similar provisions appear in share option plans, employment contracts and directors’ service agreements, and all of these documents need to be consistent. A leaver who is “good” under the option plan and “bad” under the articles is a dispute waiting to happen. 

Leaver provisions are not restrictions on transfer as such. They are compulsory transfer provisions: on a defined event, the leaver can be required to sell some or all of their shares, at a price set by a formula. See our article on share transfer restrictions. 

Who is a good leaver and who is a bad leaver?

There is no statutory definition, so the parties are free to choose their own. Typical approaches are: 

• Good leaver. Often defined as someone who leaves because of death, serious ill health or disability, redundancy, or retirement with the board’s consent. Many agreements also treat a person as a good leaver if the board decides they should be, or if they leave after a specified period. 

• Bad leaver. Often defined as someone who resigns within a specified period, is dismissed for gross misconduct or fraud, breaches their restrictive covenants or the shareholders’ agreement, or is disqualified as a director. Some agreements simply define a bad leaver as anyone who is not a good leaver. 

• Intermediate leaver. Investor documents frequently add a middle category, for example someone dismissed without cause, who keeps their vested shares and must sell only the unvested portion. 

Vesting is the most effective way of making the outcome fair. Under a typical time-based schedule, a founder’s shares “vest” in instalments, often monthly or quarterly over three or four years, sometimes after an initial cliff. A good leaver keeps the vested shares, and only unvested shares are subject to compulsory transfer at a low price. Accelerated vesting on a sale of the company is a common point of negotiation. 

One definition needs particular care. Many agreements treat an employee who is “unfairly” or “wrongfully” dismissed as a good leaver. Whether a dismissal was unfair is decided by an employment tribunal, often months after the company needs to know what price to pay. The agreement should say how the classification works in the meantime, and whether the price is adjusted if a tribunal later reaches a different conclusion. 

What price does a leaver receive?

The price usually depends on the category of leaver: 

• Good leavers typically receive fair value, often determined by an independent valuer if the parties cannot agree. The agreement should say whether fair value is calculated on a pro rata share of the whole company or with a discount for a minority stake. See our article on minority discounts in unfair prejudice petitions. 

• Bad leavers typically receive the lower of the price they paid and fair value, and sometimes only nominal value. In Lee v GSquare, discussed below, a “Very Bad Leaver” was to receive £1 for the whole holding. 

Where shares are issued to directors or employees, they cannot be allotted at a discount to their nominal value (section 580, Part 17 of the Companies Act 2006). They may, however, be issued for less than their market value, which is what makes the tax treatment important. 

Are bad leaver provisions enforceable?

A leaver who is required to sell at a fraction of market value will often argue that the provision is an unenforceable penalty. The Supreme Court’s decision in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 makes that argument considerably harder. The penalty rule applies only to secondary obligations, triggered by a breach of contract, that impose a detriment out of all proportion to the innocent party’s legitimate interest. The court accepted that an obligation to transfer assets at an undervalue is capable of being a penalty (at [16]). 

Cavendish itself concerned a compulsory transfer of shares. A seller who breached his restrictive covenants could be required to sell his remaining shares at a price based on net asset value, excluding any value for goodwill. The Supreme Court held unanimously that this was not a penalty. Cavendish had a legitimate interest in matching the price to the value the seller was contributing to the business, and in not paying for goodwill when the seller’s loyalty and connections were being deployed for competitors (at [82]). Lord Neuberger and Lord Sumption, with whom Lord Carnwath agreed, held that the clause was a primary obligation and outside the penalty rule altogether (at [83]). Lord Hodge treated it as a secondary obligation but found it enforceable (at [279] to [280]). 

In Lee v GSquare Capital II LP [2023] EWHC 3017 (Ch), the High Court applied that reasoning to leaver provisions in a company’s articles. The right to require a transfer arose when an employee became a leaver, not on a breach of contract. That made it “a clearer example of a primary obligation” than the clause in Cavendish (at [62]). The price provision was a price adjustment mechanism, the penalty doctrine was not engaged, and the leaver’s argument would have meant rewriting the parties’ bargain (at [67]). The court also rejected an argument that the transfer notice was invalid because it did not specify which category of leaver Mr Lee was. 

Two cautions remain. First, where a transfer at an undervalue is triggered by a breach, rather than by leaving, the provision is more exposed to challenge, and it should be justified by a legitimate commercial interest. Secondly, in smaller companies run on the basis of personal trust, using leaver provisions to force out a founder may give rise to an unfair prejudice petition (section 994; O’Neill v Phillips [1999] UKHL 24). Clear drafting, agreed at the outset and explained to all parties, is the best protection. 

How is the transfer carried out?

Leaver provisions often fail on the mechanics rather than the principle. The main points are: 

• Who buys. The shares are usually offered to the company, other shareholders, an employee benefit trust or an incoming employee. The agreement should say who has priority and whether anyone is obliged to buy. 

• Buybacks by the company. A company buying its own shares must comply with Part 18 of the Companies Act 2006. The shares must be fully paid, the contract must be approved by the shareholders, and the price must generally be paid on completion out of distributable profits or the proceeds of a fresh issue of shares. If its articles authorise it, a private company can also use cash up to the lower of £15,000 and the nominal value of 5% of its fully paid share capital in each financial year (section 692(1ZA)). 

• Deadlines and notices. The articles should set a period within which the company can require a transfer, as the 12-month window did in Lee v GSquare, and should say exactly what a transfer notice must contain. 

• Completing the transfer. The articles should authorise a director to sign the transfer on the leaver’s behalf if they refuse to do so. 

What are the tax issues?

Shares acquired by directors and employees are usually “employment-related securities” under Part 7 of the Income Tax (Earnings and Pensions) Act 2003. Because leaver provisions can force a sale below market value, the shares will often be “restricted securities”. Without planning, this can lead to an income tax charge when restrictions lift or the shares are sold. The employer and employee can usually avoid much of that exposure by making a joint election under section 431, which must be made within 14 days of the acquisition. Tax-advantaged option schemes, such as EMI, have their own rules on leavers and should be aligned with the articles. 

Leaver provisions: a practical checklist

When agreeing leaver provisions, founders and investors are likely to need to consider: 

• Categories. Clear definitions of good, bad and any intermediate leaver, including how disputed dismissals are treated. 

• Vesting. The vesting period, any cliff, and acceleration on a sale. 

• Price. How fair value is determined, by whom and whether a minority discount applies. 

• Trigger. Linking compulsory transfer to ceasing employment or office, rather than to a breach. 

• Board discretion. Whether the board or an investor majority can treat a leaver more favourably. 

• Mechanics. Time limits, transfer notices, who may buy and the power to sign on the leaver’s behalf. 

• Company law. Compliance with the buyback rules if the company is the buyer. 

• Tax. Section 431 elections at the time of issue, and consistency with any option scheme. 

At Maybrook Law, we draft and negotiate leaver provisions for founders and investors, and we act in disputes when a departure turns contentious. We know which provisions are tested when relationships break down, and we draft with that in mind. If you are issuing shares to co-founders or employees, or facing a leaver dispute, we would be pleased to advise on your position. 

This article reflects the law as at 10 August 2026. Our insights, articles and guides do not, and are not intended to, constitute legal advice or be an exhaustive review of all legal developments. Although every effort is made to ensure that the information provided in this article is accurate as of the publication date, please be aware that this area of law may be subject to change. Please seek legal advice before applying the information provided to any specific circumstances, transactions or legal issues.