Employee share schemes are designed to reward individuals for helping to build a company, but what happens when an employee decides to move on?
Whether you're granting EMI options, growth shares, ordinary shares, or another form of equity, you'll need clear rules (called leaver provisions) covering what happens when someone leaves the business.
Without them, you risk disputes, cap table complications, and difficult conversations later on.
Leaver provisions are rules that determine what happens to an employee’s shares or options when they stop working for the company. They help to answer key questions such as:
Leaver provisions are there to protect both the company and the individual by setting clear expectations upfront.
Without clear provisions, a company could find itself with former employees holding significant equity long after they’ve stopped contributing to the growth of the business.
Leaver provisions commonly appear in:
Option agreements
For EMI and unapproved options, leaver rules are typically included within the option agreement itself.
These provisions often specify whether options lapse, whether vested options can be exercised (and relevant deadlines), and board discretion.
Articles of association
If someone already owns shares, the company’s articles may contain compulsory transfer provisions that require shares to be offered back under certain specific circumstances.
Shareholders’ agreements
A shareholders’ agreement might include:
Before discussing leavers, it’s important to understand the difference between shares and options.
Options:
An option gives someone the right to acquire shares in the future if certain conditions are met - they do not own shares immediately.
This distinction is important because unexercised options are generally much easier to cancel when somebody leaves.
Shares:
Once shares have been issued, the individual is immediately a shareholder. Removing those shares becomes significantly more complicated because the shareholder holds rights to them.
In many cases, equity that has yet to vest is forfeited when the employee leaves. This applies to both shares and options, whether the arrangement is:
This is simply because the individual hasn’t yet earned that portion of their reward. Vesting is put in place to reward genuine contributions to the growth of a business.
If the shares have yet to vest, that’s because the conditions for those shares were not met, and so it’s generally considered fair to all parties that those shares are forfeited.
However, if the employee has options that have vested, things generally become more nuanced. It’s common for companies to choose one of three approaches:
1. All options lapse
This is considered the simplest approach. Upon leaving, all vested and unvested options lapse, and the employee walks away with no equity entitlement.
This approach maximises protection for the company, but can feel harsh if someone has made a meaningful contribution.
2. Good leavers keep vested optionsThis approach rests on the conditions in which the employee left. Under this model, unvested options lapse whilst vested options may remain exercisable.
This can be seen as a fair compromise, allowing individuals to keep what they’ve earned but lose any future entitlement.
3. Board discretion
Some option agreements allow the board to determine what happens on a case-by-case basis.
This provides flexibility for companies to decide who gets to keep what on the grounds of their contributions and relationships.
The board could:
This approach is useful because not every departure is the same; however, discretion should be exercised as consistently as possible to avoid disputes
Many agreements distinguish between good and bad leavers.
Whilst definitions vary, the principle remains the same - people who leave under positive circumstances receive more favourable treatment than those who don’t.
What is a good leaver?
A good leaver is generally someone who leaves for reasons beyond their control or under acceptable circumstances. Common examples include:
Good leavers may be allowed to keep vested options, exercise options after leaving, retain shares already acquired, or sell shares at market value.
What is a bad leaver?
A bad leaver is classed as someone who leaves in circumstances that are considered harmful to the company. This could include:
Bad leavers may be required to forfeit their options, sell their shares (possibly at a discount), or receive only nominal value for their shares.
Once somebody owns shares, the company may want the ability to recover them. A compulsory transfer provision can require departing shareholders to offer their shares for sale. These provisions are found in the company’s AoA or shareholders’ agreements.
Without these provisions, a former employee could potentially remain a shareholder indefinitely.
This is one of the most important aspects of any leaver provision, and different agreements use different pricing methods.
Fair market value
The departing shareholder receives the current market value of the shares, which is often considered appropriate for good leavers. For example, if a person’s shares are worth £50,000, they’d receive £50,000.
Cost price
The individual receives the amount they originally paid for those shares. If a person paid £1,000 for their shares, they’d receive £1,000 back, regardless of the actual market value of the shares.
Nominal value
The individual receives only the face value of their shares at nominal value. For example, if a person owns 10,000 shares at a nominal value of £0.01 each, they’d receive £100.
This is most commonly associated with bad leaver provisions.
Discounted market value
Some agreements use a percentage discount, which can vary depending on the specific leaver conditions. For example:
This route, whilst not extremely common, creates more flexibility than a simple distinction between good and bad.
If the documentation permits this situation, then the company can. The ability to force a transfer usually needs to be established before the shares are issued.
Without appropriate provisions, forcing a sale can be difficult or even impossible. This is why founders should address leaver provisions before granting equity rather than after somebody leaves.
Investors pay close attention to leaver provisions, as founder control and ownership all play a role in alignment and company growth.
A cap table containing substantial equity held by former employees can raise concerns because:
This becomes even more problematic if those shares retain specific voting rights or enable ex-employees to have a say in the running of the business.
Well-structured leaver provisions help ensure equity remains available to reward current and future contributors to the growth of the business.
This is why investors frequently ask about vesting schedules, option pools, and leaver provisions during due diligence.
When designing leaver provisions:
Once you’ve thought through your vesting and leaver provisions, it might be time to put the right structure in place. Vestd makes it easy to design and manage share schemes that reward your team.
From EMI options and growth shares to cap table management, our platform helps you to build share option schemes that are right for you.
Book a call with one of our experts to discuss your plans and explore the platform.