Meaning
Provisions in a shareholder agreement dictate how a departing founder’s equity is priced and repurchased. These buyout mechanics govern the exit process to prevent deadlocks. The scope remains limited to equity recovery.
Trigger Event
Specific circumstances must occur to initiate the recovery of shares. A founder might resign or face termination. Under these conditions, the company holds a unilateral option to acquire the shares rather than allowing them to pass to third parties.
Valuation Method
The financial formula used to determine the share price must be established before any dispute occurs. Agreements often rely on book value or a pre-negotiated multiple of revenue. Using a set calculation reduces the risk of protracted negotiations.
This structured approach prevents founders from demand-pricing shares during a crisis. Appraisers look at historical cash flows and comparable market transactions to determine the current worth of the shares. Setting the price method early removes emotional arguments from the process.
Execution Method
Payment terms specify the timeline and funding mechanism for the stock recovery. The company can choose to pay the entire sum immediately or distribute the obligation across several annual installments to preserve working capital. A promissory note frequently secures this long-term obligation.
Securities laws govern the transaction to ensure that the repurchase does not trigger insolvency.
