What it means
A manager owns shares in the company where she works, and when she leaves the equity agreement may require a transfer or change her option rights. The first question is whether the contract treats her as a good leaver, a bad leaver or another category.
These terms are labels created by documents, not a general reward for being well liked. Common examples of favourable reasons include retirement, ill health, death or redundancy, but a particular plan may treat voluntary resignation differently and definitions can be negotiated.
A UK law firm, Gannons, describes how articles and shareholder agreements can create different transfer rules and valuations. Russell-Cooke also explains that favourable treatment can vary.
The label can determine how much of an equity award survives: vested options may have an exercise window, while unvested options may lapse, vest early or receive partial treatment. For issued shares, the agreement may allow the holder to keep them or require a sale at fair market value, another formula or a fixed price, so never assume 'good leaver' means the person simply walks away holding every vested share.
Read the shareholder agreement, articles, option plan, grant letter and employment terms together, because they may describe different assets and triggers and, if they conflict, the outcome may need legal interpretation rather than a quick spreadsheet calculation. Define the trigger precisely, whether it is notice of resignation, actual termination, loss of director office or a later board determination.
The date can change vesting and valuation, so a person who gives notice near an award anniversary has a strong reason to know which date counts. Discretion clauses need careful governance, because a board may have authority to classify a departure or waive a restriction but should document the decision and manage conflicts.
Set a valuation method before anyone leaves, since private-company shares rarely have a daily quoted price. The agreement can identify an independent valuer, valuation date, assumptions and dispute procedure, and 'fair market value' is not a single obvious number in every context, as minority discounts, debt and recent financing terms may be relevant.
A simple illustrative buyout is eligible shares multiplied by the agreed price per share, so ten thousand shares at $12 each equals $120,000, but only if all 10,000 are subject to buyback at that price and there are no deductions or special rights. Payment terms also matter, because a buyback might require instalments, regulatory steps or a transfer to other shareholders rather than the company, so check the buyer, funding and legal capacity before promising immediate cash.
For option holders, tax and exercise costs may affect the actual benefit, and a person may need to pay the exercise price before becoming a shareholder. Employee treatment and share treatment are also distinct: a fair dismissal process does not automatically make someone a good leaver, and a contractual equity category does not replace employment-law rights.
In practice
Real-world examples.
Example
An option plan treats retirement after a stated age as a good-leaver event. A senior engineer retiring at that age keeps her vested options for a defined exercise window, while the plan states what happens to the unvested portion. She reads the grant letter alongside the plan before relying on either.
Example
A shareholder agreement requires a qualifying leaver to transfer shares at a documented valuation. The agreement names an independent valuer and a valuation date, so the price is not left to negotiation after the departure. The company confirms who will fund the purchase before promising a payment date.
Example
A departing manager checks vested and unvested awards separately before accepting an exit calculation. Before quoting a price, the company verifies her grants, the vesting ledger, the share register and the signed documents. It then explains the classification, quantity, valuation and payment route in writing.
Formula
Calculation
Illustrative gross buyout = eligible shares x agreed price per share. 10,000 x $12 = $120,000, only if those shares and that price are covered by the agreement.
Classification can change the payment materially. In a hypothetical agreement where a good leaver's shares are bought at $12 each but a bad leaver's shares at $8 each, the same 10,000 shares would produce $120,000 or $80,000, a difference of $40,000.
For options, the benefit is the gain after the exercise price. If a good leaver keeps 2,000 vested options with an exercise price of $5 and the agreed share value is $12, the gross gain is 2,000 x ($12 - $5) = $14,000 before tax and costs, and any unvested options may lapse.Case study
Seen in the real world.
This entirely fictional example follows Summit Apps, an invented startup. A co-founder left after illness, and the shareholders discovered that their documents did not explain a valuation process. They negotiated an exit and later revised the agreement to identify qualifying events, a valuer and treatment of unvested awards. The revised clauses helped define future decisions but could not retroactively settle the first dispute.
When redrafting, the founders modelled several exits: disability, retirement, dismissal without cause, misconduct and voluntary departure. For each they decided whether vested and unvested holdings should differ, and local counsel checked enforceability and consistency. Clear definitions also helped the company retain talent and manage ownership, because new hires could see what would happen to their equity in each scenario. The example does not assume illness triggers identical rights in every plan.
Watch out
Common mistakes.
- Assuming every favourable departure allows all vested shares to be kept.
- Omitting a valuation date and dispute process for private shares.
- Mixing up issued shares, vested options and unvested awards.
Questions
People also ask.
What is a good leaver?
A departing equity holder who meets the favourable category defined in the relevant documents.
What are examples?
Documents may name retirement, illness, death or redundancy, but there is no universal list.
What happens to their shares?
The contract may permit retention or require transfer at a stated valuation; check each asset and vesting status.
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