Bad-leaver and good-leaver clauses: protecting founders

Nobody creates a startup intending to part ways… but planning for the unexpected protects the business and its founders. good leaver and bad leaver clauses arrange the buyback of a departing founder-shareholder’s securities, distinguishing a departure in good standing from one involving misconduct. Properly drafted, they limit disputes, reassure investors and prevent governance deadlocks.

Good leaver, bad leaver: definitions and value for founders

Originating in Anglo-American practice, these clauses appear in France in the shareholders’ agreement and sometimes in the articles. They are not required by law, but have become standard in startup life. A good leaver is a shareholder who leaves for a legitimate reason (illness, disability, death, retirement, redundancy, removal from corporate office without misconduct, etc.), with a favourable buyback price (often fair value). A bad leaver is a shareholder whose departure involves misconduct (serious/gross misconduct, resignation without notice, breach of non-compete or confidentiality obligations or the shareholders’ agreement), with a discounted buyback price.

Under French law, the economic sanction incorporated into a reduced buyback price is frequently treated as a penalty clause, which a court may adjust if it is manifestly excessive or derisory (Code civil, art. 1231‑5; Legifrance). Where the parties disagree on price determination, an expert may be appointed under article 1843‑4 of the Code civil (Legifrance).

For an institutional overview of shareholders’ agreements and their value to SMEs/startups, see Service Public Pro. For a practice overview, see Le Mag Juridique, LegalPlace, Victoris Avocat and Hashtag Avocats.

Triggering events: classify the departure properly

Typical “good leaver” events

• Death, incapacity or disability recognised by a competent body.
• Retirement (specified age and/or contribution-quarter conditions).
• Redundancy, termination of office without misconduct or reorganisation not attributable to the founder.
• Non-renewal of corporate office without grounds of misconduct.

Typical “bad leaver” events

• Serious or gross misconduct (specify concrete examples: misappropriation, unfair competition and breach of confidentiality).
• Resignation without contractual notice or during a defined sensitive period (fundraising, closing or key deployment).
• Material breach of the shareholders’ agreement (non-compete, non-solicitation, non-disparagement, etc.).
• Repeated, documented failure to meet essential objectives explicitly accepted.

Take care with founders who are employees or corporate officers: misconduct is assessed under employment or company law. Do not confuse the reason for employment termination with good/bad leaver status under the shareholders’ agreement; align definitions, burden of proof and disciplinary procedures to avoid contradictions (also see what to do if a shareholder wants to leave your startup).

Buyback price: discount/bonus formulas and safeguards

Reference valuation methods

• Fair value determined by an article 1843‑4 expert in a dispute (provide for referral and cost allocation; Legifrance).
• Latest market valuation (last funding round, adjusted for significant events).
• Combined methods (recurring revenue x multiple, simplified DCF) with objectively assessable parameters.

Examples of commonly negotiated schedules

• Bad leaver (graduated discount): Year 1: 20% of fair value; Year 2: 40%; Year 3: 60%; Year 4: 80%; Thereafter: 100%.
• Good leaver: 100% of fair value, sometimes a bonus of 10–20% where strategic objectives are achieved or a successful sale occurs.

Compliance good practices:

• Proportionality: avoid a “confiscatory” discount; a court may reduce it (penalty clause, art. 1231‑5; Legifrance).
• Objectivity: provide a clear method or, failing that, appointment of an article 1843‑4 expert.
• Transparency: document objectives and commitments to limit litigation over good/bad classification.

Implementation procedure and forced buyback

Provide a structured process to avoid challenges for invalidity or abuse:

• Notification of departure and its classification (deadline, form, supporting documents and opportunity to respond).
• Price determination (agreed formula, article 1843‑4 expert in case of disagreement, assignment deadlines).
• Buyer: company (buyback for cancellation), other shareholders (pre-emption) or approved third party; order of priority.
• Financing: payment facilities, escrow, pledge and contingent additional price.
• Deadlines: customary 30/60/90-day milestones between notification, price determination, transfer and payment.

If a company buyback is contemplated, anticipate the capital mechanics (capital reduction/share buyback and formal compliance). To manage sensitive corporate steps, see our guide to capital increases and pitfalls to avoid.

Key founder/investor negotiating points

• Vesting/reverse vesting of founders’ shares aligned with the good/bad leaver schedule and your incentive plans (see our comparison of BSA, BSPCE, AGA).
• Minimum service threshold to qualify as a good leaver (e.g. 24 months).
• Contractual definition of misconduct and an adversarial procedure, to avoid unilateral classification.
• Coordination with the term sheet and exit rights (drag/tag along, liquidation preference); see our guide to the term sheet and its key terms.
• Neutralising the dilutive effects of departure for remaining founders; consider alongside your strategy for limiting dilution.

Recommended structure of a good/bad leaver clause

• Purpose and scope (securities concerned: ordinary/preference shares, BSA/BSPCE already exercised).
• Departure events and classification (exhaustive lists, evidential criteria and competent bodies).
• Price: default method + article 1843‑4 expert, discount/bonus schedule and justified floor/cap.
• Buyer identity (company/shareholders/third party), pre-emption right and approval.
• Procedure (deadlines, notifications, documents and escrow), payment terms and safeguards.
• Sanctions for non-performance (proportionate penalty clause, interest and coercive payment).
• Compatibility with articles, option/BSPCE plans, convertible debt and existing shareholders’ agreements.

An overview of other structural clauses appears in our article shareholders’ agreement: essential clauses.

Two worked examples

1) Departure involving misconduct at 18 months (bad leaver)

Reference valuation: €5 million (last round). Bad-leaver schedule: year 2 → 40%. Buyback price: €2 million for 100% of capital; for a 10% holding: €200k. If misconduct is disputed, an article 1843‑4 expert may be engaged for valuation, and a court could moderate an excessive discount (art. 1231‑5; Legifrance).

2) Death of a founder (good leaver)

The estate becomes the owner of the shares. The clause provides for a buyback at 100% of fair value within 60 days, with instalment financing. The shareholders’ agreement must coordinate approval and pre-emption rights to avoid an ownership deadlock. Useful guidance on judicial and amicable procedures is available on Justice.fr.

Litigation: reducing risk and securing enforcement

• Clear drafting: exhaustive event lists, time thresholds and required documents.
• Proportionality of discounts to avoid reclassification/partial invalidation by the court (penalty clause, art. 1231‑5; Legifrance).
• Expert valuation mechanism (art. 1843‑4) detailed: appointment, assignment and deadlines (Legifrance).
• Mediation/conciliation required beforehand to limit litigation delays/costs (useful resources on Justice.fr).
• Alignment with HR commitments (non-compete and confidentiality) and incentive plans.

Quick drafting checklist

• Precisely define bad leaver and good leaver events (evidence and bodies).
• Set a clear price formula (proportionate discount/bonus), with recourse under article 1843‑4 in a dispute.
• Set out an enforceable procedure (deadlines, notifications, pre-emption right, approval and payment).
• Check proportionality in light of the penalty clause (art. 1231‑5 C. civ.).
• Document the objectives/commitments forming the basis of good/bad classification.