Few clauses in a shareholders’ agreement cause as much concern as leaver provisions. They decide what happens to a person’s shares when that person leaves the company. The fear, which is not entirely unfounded, is that they can remove all or a large part of a shareholding.
Leaver provisions are often assumed to apply only to founders and chief executives. In fact, they can affect anyone who holds equity, including founders, senior executives, early employees, advisers and option holders. As the company grows, more people hold meaningful equity, and a clause that received little attention at formation may affect dozens of people several years later. The issue is often noticed only when a departure is already under way. Many founders assume that a professional departure preserves the value earned. The documents frequently say otherwise.
In Singapore, good leaver and bad leaver terms, together with claw-back rights over founder equity, are staple terms in shareholders’ agreements.
- What Leaver Provisions Are
Leaver provisions are compulsory transfer clauses. They are placed in a shareholders’ agreement or in the company’s constitution, and they require a departing director or employee to transfer shares at an agreed value to the other shareholders or to the company. Their purpose is to protect the company and the remaining shareholders by keeping equity with those who remain active in the business and by discouraging unwanted departures.
Company law does not itself compel a departing employee or director to sell. Without such clauses, the person keeps the shares. The clauses operate only if the constitution is specifically amended or if they appear in a shareholders’ agreement.
The classification of the leaver is what matters most. Two people may hold the same number of shares and leave on the same day, yet receive very different amounts depending on how the agreement classifies each of them. The classification generally controls whether the departing person receives fair value for vested equity or loses some or all of that value.
In Singapore, these terms often begin in the founders’ agreement, which sets out vesting and leaver provisions, including the definition of good and bad leavers and the terms for repurchase or transfer of shares. A founders’ agreement is not a legal requirement for incorporation. It operates as a private contract between the founders. A shareholders’ agreement, by contrast, governs the relationship among all shareholders, including later investors, and the founders’ agreement is commonly complemented or replaced by it as the company takes on outside funding.
- Why the Provisions Exist
Leaver provisions are a common investor protection, particularly in early-stage companies where the founders are critical to the business and their commitment forms part of the investor’s reasoning for investing. The view is that a founder should be discouraged from leaving in the short or medium term after investment. The provisions also free space in the capitalisation table to incentivise replacement senior hires if a founder does leave.
Investors also point to alignment of incentives. The concern is not only that someone leaves. It is that a person could depart soon after receiving equity and still keep the same economic benefit as a person who stays committed for years.
Three reasons are usually given for including the provisions. The first is fair treatment, since a person who exits for reasons outside personal control should receive reasonable value for the equity. The second is deterrence, since the possibility of reduced value discourages conduct that could harm the company. The third is continuity, since a clear framework for exits reduces disruption to the business.
The provisions also work in both directions. The same protections that can feel threatening to a founder personally are the ones that protect that founder if a co-founder walks away. For this reason, leaver provisions are better understood as a shared safeguard than as a term aimed at one side.
In practice, the strongest justification for the clause is the link between equity and future contribution. Where shares are issued at nominal cost to a founder who is expected to build the business, the shares represent a promise of continued work as much as ownership. A clause that returns unearned shares to the company is consistent with that logic. The difficulty arises when the same clause is applied to shares that have been earned through years of service.
- The Good Leaver
A good leaver is generally a person who leaves under circumstances that the company or its investors regard as acceptable. Typical examples are death, disability, retirement and resignation for good reason, which are circumstances often outside the person’s control. Wrongful termination and departures approved by the board are also commonly included. A termination without cause is another usual example, where the person may keep vested shares. One simple formulation defines a good leaver as a person who has not left because of gross misconduct or breach of contract.
The consequences are generally favourable. A good leaver can usually sell at market value. In Singapore agreements, vested equity of a good leaver may not be subject to a purchase right at all, or may be purchasable only at fair value. Unvested equity, in both the good leaver and bad leaver cases, is generally purchasable at a nominal price, either by the remaining shareholders or by the company, and a purchase by the company must comply with the share buy-back rules in sections 76B to 76G of the Companies Act 1967.
The method of valuation is a central point. Agreements may set a pre-agreed formula, require an independent valuation or apply a multiple of earnings. Fair value may be assessed by an independent third-party appraiser or pegged to a percentage of the latest preference share price. The remaining shareholders or the company may also be given the right to buy the shares, which maintains continuity while protecting the financial position of the departing shareholder.
The underlying principle is that a person who leaves under approved circumstances should not automatically lose the value that the person helped create. The practical difficulty is that many founders assume more situations qualify as good leaver events than the documents actually provide.
- The Bad Leaver
Bad leaver provisions apply when a departure occurs under circumstances viewed negatively by the company or its investors. Traditional examples are fraud, gross misconduct, breach of restrictive covenants and serious policy violations. A bad leaver is also described as a person who breaches an employment contract, is dismissed for gross misconduct, or leaves within a defined period. Other formulations include breach of the shareholders’ agreement and voluntary resignation without good reason.
In Singapore, a bad leaver is typically a founder terminated for “cause” or one who resigns without “good reason”. Both definitions are heavily negotiated. The consequences are significant. The company, and occasionally other investors, may buy some or all of the vested equity at nominal value or at a discount to fair value. A bad leaver may be limited to the lower of market value and issue price, or, less commonly, to nominal value.
In some transactions, named shareholders such as founders cannot be bad leavers, or are required to transfer only a percentage of their shares. The reduction in value is intended to deter conduct that may harm the company or its shareholders, and the agreement may also give the remaining shareholders or the company a right of first refusal over the shares.
Where breach of restrictive covenants is a trigger, the covenants themselves must be carefully drafted to be enforceable under the law. The label matters less than the definition behind it. A bad leaver clause that is limited to fraud and serious misconduct is accepted by most parties as reasonable, because the result follows from clearly wrongful conduct. The same clause becomes contentious once the definition of “cause” is widened to include performance concerns, technical breaches or ordinary resignation.
- How Vesting Interacts with Leaver Status
Leaver provisions seldom operate alone. They are paired with a vesting schedule that sets out how a founder earns equity over time. In Singapore practice, a one-year cliff followed by monthly vesting is common, and a four-year schedule with a one-year cliff is a typical example.
Under this structure, a good leaver keeps the vested portion of the shares, while the unvested portion must be transferred back, usually at a nominal price. If the founder leaves before the one-year cliff, all shares subject to vesting are caught. This is technically reverse vesting, because the founder legally holds the shares from the first day and the restrictions fall away over time.
Where equity is held as options, the position differs. A common default is that options lapse on departure unless the board decides otherwise, and a good leaver may be allowed to keep vested options. Once options are exercised, the holder becomes a shareholder, and a buy-back of those shares requires a separate provision in the constitution or in a shareholders’ agreement that the holder signs on exercise. Beyond vesting, four points account for most of the negotiation over leaver terms, and they are discussed below.
- Resignation
The most debated question is whether voluntary resignation should make a person a bad leaver. Investors often say yes. Investors commonly push for voluntary resignation during the vesting period to be a bad leaver event. As a result, an executive who performs well, gives proper notice, helps with the transition and leaves professionally may still receive unfavourable treatment. This gap between expectation and contract wording is responsible for many leaver disputes. The Singapore formulation, resignation “without good reason”, moves the dispute to the meaning of good reason. A definition that covers serious illness, family emergencies and material changes to role or pay is more balanced than a bare resignation trigger.
- Time-based carve-outs
A time-based carve-out converts certain voluntary resignations into good leaver events after a set period of service, often two to three years. It recognises long-term contribution while still protecting the company against short-term departures, and it reduces the risk of executives feeling trapped by an equity structure they helped build.
- Pre-vested shares
In more mature companies, founders may argue that part of the shares should be treated as already vested to reflect past commitment, with a new vesting schedule applying to the rest. If so, investors are well advised to ensure that pre-vested shares are still caught by the bad leaver provisions, so that a summary dismissal would still lead to total loss regardless of pre-vesting.
- Dismissal for cause
The definition of cause usually tracks the employment contract. A person who can be dismissed without notice will typically be a bad leaver. Founders should ensure that cause is not defined so widely that minor or technical breaches lead to forfeiture.
- Conclusion
Leaver provisions are not inherently unfair, but for founders and executives they are among the most consequential standard clauses in any agreement. Handled well, they align long-term commitment and protect value for everyone. Handled badly, they create resentment and damage trust at the point when teamwork matters most.
The clauses are contractual and must be properly placed in both the shareholders’ agreement and the constitution. The rule against penalties applies only to breach-triggered clauses, so the most important protection for a departing person is a fair definition and not a legal challenge after the event. Terms should be balanced between employer and employee, so that the company and existing shareholders are protected without leaving recipients feeling locked in. Most disputes over executive equity begin years before any departure, when the documents are first negotiated.