Leaver Clauses in Australian Startup Shareholder Agreements

In a growing startup or small business, people changes are inevitable. A co-founder might burn out. A key employee might resign. An investor might push for a restructure. Or a business relationship simply might not work out.

When someone exits, it’s not just an “HR issue”. If that person owns shares or units, has decision-making power, or holds key know-how, their departure can create real legal and commercial risk for your business.

That’s where leaver clauses come in.

If you’ve been Googling what a leaver is, you’re probably trying to understand what happens when a shareholder (often a founder) leaves your business, and how you can protect the company (and the remaining owners) from getting stuck in an unfair or unworkable position.

Below, we’ll walk you through what a leaver is in practical terms, how “good leaver” and “bad leaver” clauses typically work in Australia, and what to think about when building (or fixing) leaver clauses in your Shareholders Agreement.

What Is A Leaver (And Why It Matters For Your Business)?

In a business ownership context, a leaver is usually a person who:

• is an owner (for example, a shareholder of a company), and
• stops being involved in the business in a particular way (for example, they resign as a director, stop working in the business, are terminated, or otherwise “exit” their role).

Leaver clauses are most common in businesses where:

• founders hold shares and also work in the business day-to-day
• there’s a mix of “active” and “passive” shareholders
• equity has been issued as part of incentives (for example, sweat equity or performance-based share grants)
• investors want certainty about what happens if a founder walks away early

The reason leaver clauses matter is simple: share ownership can outlast employment or involvement.

Without clear leaver provisions, you can end up with a former founder who:

• keeps their shares (and voting rights)
• blocks decisions (or pushes decisions that don’t align with your current strategy)
• benefits financially from future growth they no longer help create
• creates uncertainty for investors or buyers during due diligence

Leaver clauses give your business a pre-agreed roadmap for handling exits, rather than trying to negotiate from scratch when emotions are high and the stakes are real.

Where Do Leaver Clauses Usually Sit?

Leaver clauses are typically included in one or more of these documents:

• Shareholders Agreement (the most common place)
• Company Constitution (sometimes used to reinforce transfer mechanics, especially for smaller companies) – see Company Constitution
• Employment agreements (less common for “leaver” language, but often tied into equity incentives and restraint provisions) – see Employment Contract
• Vesting arrangements (for founders or employees receiving equity over time)

For most startups and SMEs, the Shareholders Agreement is the core document because it governs ownership, decision-making, exits, and transfers.

It’s also worth remembering that leaver clauses need to “match” how your business is actually set up. A company with multiple directors and shareholders may need different mechanics to a family business with two owners, or a startup issuing equity to early team members.

Leaver Clauses vs Vesting: What’s The Difference?

People often mix these up, so it’s worth clarifying.

• Vesting usually answers: “When does this person actually earn/keep their equity?”
• Leaver clauses usually answer: “If this person leaves, what happens to any equity they already hold (or have vested)?”

In practice, many modern Shareholders Agreements use both. Vesting reduces the risk of someone leaving early with a large stake. Leaver clauses deal with the messy real-world scenarios that vesting doesn’t fully cover (like disputes, misconduct, or forced exits).

Good Leaver vs Bad Leaver: How These Categories Work

Most leaver frameworks split exits into categories, commonly:

• Good leaver
• Bad leaver

The category matters because it typically determines whether the departing person must sell their shares, and if so, at what price.

In simple terms:

• A “good leaver” usually exits in a way that feels fair or unavoidable.
• A “bad leaver” usually exits in a way that harms the business, breaches obligations, or involves wrongdoing.

The definitions are negotiable, and they should reflect your risk profile and culture. The key is being specific enough that everyone can predict the outcome if a departure happens.

Common Good Leaver Scenarios

A good leaver definition often includes scenarios like:

• death or permanent incapacity
• serious illness or injury (where continuing isn’t reasonable)
• redundancy (if the person is also an employee)
• retirement (more common in established SMEs)
• exit with board/shareholder approval (for example, “mutual separation”)

Some businesses also include resignation with sufficient notice and a proper handover as a “good leaver” scenario, especially where there’s no dispute and no breach.

Common Bad Leaver Scenarios

A bad leaver definition commonly includes:

• termination for serious misconduct
• material breach of the Shareholders Agreement (for example, breaching confidentiality or restraints)
• fraud, dishonesty, or criminal conduct impacting the business
• resignation in breach of obligations (for example, walking out at a critical time without notice, if the agreement treats that as a breach)
• poaching staff or clients, or setting up a competing business

The “bad leaver” label can be commercially powerful, so you’ll want to draft it carefully. Overly broad definitions can create unfairness and tension between founders, while overly narrow definitions can fail to protect the business when it matters most.

What Happens When Someone Is A Leaver? (The Practical Outcomes)

Once someone is classified as a leaver (and usually as either a good leaver or bad leaver), the agreement sets out the consequences.

While there’s no single “standard” approach, leaver clauses often deal with these core issues:

1) Do They Have To Sell Their Shares?

Many leaver clauses trigger a mandatory transfer (sometimes called a “compulsory transfer”) of some or all shares.

From a business owner’s perspective, this can be crucial because it avoids situations where:

• a person who no longer contributes still holds voting power
• you can’t bring in new investors cleanly
• a future buyer is put off by “dead equity” on the cap table

Some agreements require transfer of:

• all shares held by the leaver, or
• only certain shares (for example, unvested or restricted shares)

2) Who Buys The Shares?

Leaver clauses often specify a buyer pathway, such as:

• the company (if a buy-back is permitted and properly documented)
• existing shareholders (often pro-rata)
• specific persons (for example, remaining founders)
• a third party approved by the board/shareholders

The “who buys” question is important because it impacts funding. If remaining founders must buy the shares personally, you’ll want to ensure the price and payment terms are realistic.

3) What Price Do They Get Paid?

Pricing is where good leaver / bad leaver distinctions really matter.

Common pricing approaches include:

• Market value (often for good leavers, but market value can be hard to calculate in early-stage startups)
• Fair value (sometimes used to exclude “minority discounts” or reflect a fairer outcome)
• Nominal value (sometimes used for bad leavers, for example $1 per share, but whether this is enforceable will depend on how the clause is drafted and applied)
• Cost price (what the leaver originally paid for the shares)
• Formula-based pricing (for example, a multiple of EBIT, or a valuation tied to the last funding round)

From your business’s perspective, you want a pricing method that is:

• clear (so it doesn’t trigger disputes)
• fundable (so the business or remaining owners can actually pay it)
• credible (so investors and buyers don’t see it as a legal landmine)

4) How Is The Price Determined (Valuation Mechanics)?

Even if you say “market value”, you still need a process for determining it.

Common valuation mechanics include:

• an agreed independent valuer appointed under the agreement
• a mechanism where each side nominates a valuer and they appoint a third if needed
• valuation based on the most recent capital raise (common for startups)
• director determination (usually not ideal on its own, because it can feel biased)

The more time you spend making the process clear now, the less likely you’ll face a costly dispute later.

5) When Do They Get Paid?

Payment timing is often overlooked, but it can be critical for cash flow.

Leaver clauses may provide for:

• payment upfront on completion of the transfer
• payment by instalments over time
• deferred payment (for example, after a liquidity event)
• set-off rights (for example, if the leaver owes money to the company)

If you’re running a startup or SME, a forced buyout at the wrong time can put serious pressure on the business. It’s worth building payment flexibility into the clause (while still keeping it fair).

How To Draft Leaver Clauses That Actually Protect Your Startup Or SME

Leaver clauses should reduce risk, not create new disputes. For many businesses, the problems start when clauses are copied from templates without thinking through how they’ll work in your specific structure and team dynamic.

Here are the key drafting points to get right.

Be Clear About The Trigger Event

What exactly makes someone a leaver?

Is it when they stop being an employee? When they resign as a director? When they stop providing services? When a certain notice period ends?

Clarity here helps avoid arguments about whether the clause is triggered at all.

Define “Good” And “Bad” Leavers With Real Examples

The best leaver definitions are practical and evidence-based.

If a “bad leaver” includes “material breach”, consider:

• what counts as “material” (and who decides)
• whether a cure period applies (a chance to fix the breach)
• whether the breach must be confirmed by a certain process (for example, a board resolution)

This is also where your other documents matter. For example, if confidentiality and post-exit restrictions are important to your business, you’ll want those obligations clearly drafted as well (often across your Shareholders Agreement and the person’s employment/contractor arrangement).

Make Sure The Transfer Process Is Workable

A leaver clause should include a step-by-step process, such as:

• notice of leaver event
• classification as good or bad leaver (and who makes the call)
• valuation process (if relevant)
• offer process to other shareholders / company
• completion steps and timing

If the process is vague, you may still end up negotiating under pressure, which defeats the whole point.

Align With Your Company Structure And Other Key Documents

If your Shareholders Agreement says shares must be transferred, but your constitution or share terms don’t support the mechanics, you can run into implementation issues.

It’s often worth checking whether your Company Constitution and any share classes or shareholder rights line up with the leaver provisions you want.

Plan For The “Human” Side Too

Even the strongest clauses won’t stop a departure from being emotional. But they can stop it from becoming destructive.

Good leaver / bad leaver clauses are ultimately about setting expectations. If your founders and key shareholders understand the rules from day one, you reduce the risk of surprise, resentment, and disputes later.

Common Mistakes We See With Leaver Clauses (And How You Can Avoid Them)

Leaver clauses can be extremely useful, but they’re also easy to get wrong. Here are some common issues we see with startups and SMEs.

1) No Leaver Clause At All

This is more common than you might expect, especially when businesses “just set up a company” and split shares without formalising how exits work.

If a founder leaves without a leaver clause, you might have no clear right to buy their shares back. That can create deadlock and make future fundraising harder.

2) Pricing That’s Unrealistic For Your Stage

Market value sounds fair, but for early-stage startups it can become a valuation fight, because:

• there may be no reliable financial history
• value may be tied to future potential rather than current revenue
• each side may have incentives to inflate or deflate the number

Using a clear formula or a valuation linked to the last funding round can be more practical.

3) Bad Leaver Definitions That Are Too Broad

If “bad leaver” includes vague concepts like “failure to perform satisfactorily” without an objective process, it can feel like a weapon rather than a protection mechanism.

This can damage trust among founders and may deter talent or investors who see it as unfair or risky.

4) Not Considering Employment Law And Termination Processes

If a shareholder is also an employee, the way you end the employment relationship matters.

A termination handled poorly can trigger claims or disputes, which then spill over into shareholder issues. Having properly drafted employment documentation helps set expectations early and supports a clearer separation pathway (see Employment Contract).

5) Forgetting About Confidential Information And Customer Data

When someone leaves, they may still have access to sensitive information.

If your business collects and uses personal information (for example, customer emails, user accounts, or mailing lists), it’s worth ensuring your privacy compliance framework is solid and up to date, including a Privacy Policy.

While privacy documentation won’t replace confidentiality obligations for founders, it’s part of building a business that is well-governed and due diligence ready.

Key Takeaways

• What is a leaver? A leaver is typically a shareholder (often a founder) who stops being involved in the business, triggering rules about what happens to their shares and rights.
• Leaver clauses help your business avoid “dead equity” and protect decision-making, fundraising, and long-term growth when a key person exits.
• Most leaver clauses split exits into good leaver and bad leaver categories, which often affects whether shares must be sold and at what price.
• A practical leaver clause should clearly set out the trigger event, classification process, transfer steps, valuation method, and payment timing.
• Leaver clauses work best when they align with your Shareholders Agreement, Company Constitution, and any employment arrangements.
• Getting the drafting right early can prevent expensive disputes later and make your business more attractive to investors and buyers.

This article is general information only and not legal advice. If you’d like help putting leaver clauses in place (or fixing a Shareholders Agreement that no longer fits your business), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.