Meaning
Retention of vested equity at fair market value is permitted by a specific clause when a shareholder exits for an approved reason. The good leaver provision applies to departures caused by death, disability, redundancy or retirement after a specified period of service. It recognizes the contribution the individual has made and ensures they are not penalized for circumstances beyond their control.
Fair Valuation
Unlike the penalties associated with a bad leaver, the price paid for shares under this clause is not discounted. This good leaver provision ensures that the departing party receives the full financial benefit of the value they helped to create. The process for determining this value is usually the same as the one used for external funding rounds or annual audits.
Eligibility Rule
Determining who qualifies for this status is a matter of checking the facts of the departure against the list of approved reasons in the shareholders agreement. The good leaver provision often requires the board to make a formal determination that the exit was not due to misconduct. This oversight prevents the clause from being used to bypass the protections intended for the company and its remaining investors.
Strategic Intent
Providing a clear and fair exit path for founders and key employees helps to maintain a positive relationship even after they leave the firm. The good leaver provision acts as a safety net that protects the individual wealth while allowing the company to manage its cap table. It balances the need for organizational stability with the principles of fairness and reciprocity that govern a healthy professional partnership.
