Converting Psychological Contracts Into Legal Equity Terms Before Capitalization
Converting psychological contracts into legal equity terms replaces unstated expectations with restricted stock, reverse vesting, and clean asset assignments.
founder repurchase option
Meaning
Equity valuation mechanisms measure the value of a departing stakeholder’s shares against the current market rate or a pre-determined discount to determine the cost of equity clawback. This contractual provision is the founder repurchase option, which gives the company or the remaining founders the right to buy back a departing founder’s unvested or vested shares. The option typically activates upon a founder’s voluntary resignation or termination.
It prevents inactive former team members from holding large voting blocks or equity shares as the company scales.
Trigger Event
Separation of a founder from the startup is the event that initiates this process. When a founder departs before their shares have fully vested, the founder repurchase option allows the company to reclaim those unvested shares immediately. The option is exercised within a specified number of days following the official termination of the founder’s relationship with the startup.
Repurchase Pricing
The price paid to the departing founder is often set to the nominal value of the shares or their fair market value depending on the circumstances of the departure. If the departure is involuntary or involves a breach of duty, the founder repurchase option is often structured to purchase the shares at the original purchase price or the lower of cost and fair market value. This pricing structure protects the remaining team from the financial loss of paying high market prices to someone who is no longer contributing.
Equity Protection
Securing a replacement executive requires that the company retains enough equity to attract talent. By cleaning the cap table of inactive founders, the business remains attractive to incoming venture capital investors who demand that equity reside with the active builders.