The Clause That Broke the Co-Founders: When ‘Good Leaver / Bad Leaver’ Backfires

In early-stage startups, few decisions are as emotionally charged, and as legally dangerous, as a co-founder’s exit.

I once saw a dispute where the “bad leaver” clause, meant to protect the company, actually destroyed it.

Here’s what happened:

Two founders had built a rapidly scaling B2B SaaS tool. Things were going well, but there was tension, one founder felt the other wasn’t pulling weight. Eventually, they invoked the “bad leaver” clause in the SHA. The clause said if a founder left under disputed terms, they’d be forced to give up their shares at a steep discount.

The problem? There was no objective mechanism to determine what a “bad” leaver actually was.

No mediation. No timeline. No burden of proof. Just an open-ended clause that gave disproportionate power to the founder still sitting on the board.

What followed:

1. The accused founder contested the claim: saying the clause was vague and unconscionable.

2. The board got deadlocked.

3. Investors froze disbursals.

4. The startup lost momentum and eventually got acquired for a fraction of its projected valuation.

When founder exits aren’t pre-mapped in clear, neutral terms, they become battlegrounds. You don’t just lose a co-founder. You lose credibility, traction, and time.

Five things your founder exit clause must include:

1. Clear triggers: Define what counts as misconduct or voluntary exit.

2. Neutral resolution: Build in a mandatory mediation or third-party assessment before triggering penalties.

3. Time-bound milestones: To avoid dragging a dispute for months.

4. Repurchase terms: At fair valuation, with flexibility for exceptions.

5. Communication guardrails: To prevent reputational spillover that affects fundraising.

Don’t assume goodwill will last forever. Draft like you’ll one day disagree, and want to walk away with dignity.