Meaning
Contractual mechanisms authorizing an enterprise to buy back issued shares from an equity holder upon the occurrence of specified departure events. Within founder agreements, an equity repurchase trigger determines the conditions under which a departing founder must surrender unvested or vested equity back to the corporate treasury. The mechanism protects the entity from retaining dormant equity holders who no longer contribute operational value.
Application of this clause depends on whether the separation is classified as voluntary, involuntary or for cause.
Valuation Formula
Pricing mechanisms embedded within equity agreements dictate the financial exchange required to execute a repurchase. When an equity repurchase trigger fires following a good leaver exit, fair market value calculations usually determine the transaction price paid to the founder. Conversely, bad leaver departures often enforce a repurchase price set to the original nominal par value of the shares.
This pricing disparity allocates financial risk and imposes direct capital costs on departing founders.
Cap Table Recovery
Reclaiming shares from departing personnel restores equity ownership to the active operating team. The recovered shares return to the unallocated option pool or increase the relative ownership percentage of remaining founders.
Execution Window
Corporate bylaws and shareholder agreements enforce strict temporal limits on when equity buybacks may occur. Once an equity repurchase trigger is activated by a departure notice, board members usually hold between thirty and ninety days to exercise the option and deliver funds. If the enterprise fails to execute the buyback within the specified window, the departing founder retains ownership of the vested equity permanently.
Cash constraints during early operational phases often prevent companies from exercising buybacks, leaving cap tables fragmented despite existing contractual rights.
