Good leaver / Bad leaver in vesting schemes

Good leaver / Bad leaver in vesting schemes

In any M&A transaction, funding round, or founding team structure, vesting schemes are no longer a novelty but have become the standard. However, within this framework of incentives and retention, there is a distinction that is often negotiated without the depth it deserves: the difference between a good leaver and a bad leaver. A clause that, on the surface, takes up just a few lines of the contract can determine whether a founder or executive leaves the company with a significant stake or practically empty-handed.

Vesting is the mechanism by which a beneficiary (whether a co-founder, executive, or key employee) gradually acquires full rights to their equity stake or stock options. However, vesting does not operate in a vacuum. The reason a person leaves the company determines what happens to the unvested stake and, in many cases, to the already vested stake as well. This is where the distinction between good leaver and bad leaver comes in.

A good leaver is someone who leaves the company for reasons beyond their control or, even if voluntary, due to objectively justified circumstances. The most common scenarios include death, permanent disability, retirement, wrongful termination or termination without just cause, or a departure agreed upon with the board of directors.

The consequences for the good leaver are, generally speaking, more favorable: they are granted the right to retain the already vested equity interest and, in some schemes, are allowed to acquire a portion of the unvested interest, proportional to the time elapsed or based on an agreed-upon percentage. In more sophisticated transactions, there is even the possibility for the good leaver to retain all vested shares in full and negotiate special terms regarding the remainder.

The repurchase price, when applicable, is typically based on the market value of the shares (fair market value) or a price not lower than the book value, which provides a financially reasonable exit.

The “bad leaver” category covers cases where the departure is voluntary without just cause, such as unilateral resignation, or, more seriously, the result of conduct harmful to the company: dismissal for cause, breach of non-compete or confidentiality agreements, or fraudulent behavior.

The contractual treatment is more punitive. The bad leaver loses the unconsolidated stake and, depending on the structure of the agreement, may be required to transfer even the already consolidated stake, typically at a symbolic price or one significantly below market value—sometimes at the original purchase price or a minimum multiple.

From the perspective of legal advice on M&A and corporate transactions, negotiating these clauses requires attention to several points of contention.

• First, the precise definition of each scenario: vague legal concepts such as “just cause,” “unfair conduct,” and “material breach” must be specified to avoid future litigation.
• Second, the buyback price: the difference between market value and par value can amount to millions of euros and is the real battleground in negotiations.
• Third, the interaction with the shareholders’ agreement: these clauses cannot be analyzed in isolation; they must be coherently aligned with drag-along rights, tag-along rights, and transfer restrictions.

 

Finally, in the Spanish context, it is advisable to review the compatibility of these structures with applicable labor and tax regulations, especially when vesting is implemented through stock options or direct delivery of shares.

The good leaver / bad leaver distinction is not a mere contractual formality. It is a corporate governance tool that distributes risk, aligns incentives, and protects those who build the company. Negotiating it rigorously, from day one and with specialized advice, can make the difference between a dignified exit and a significant loss of wealth.