If It Doesn't Work Out: Exit & Repurchase Rights

Repurchase Rights for Unvested Equity

The Standard Approach

Unvested equity should always be subject to repurchase at the original purchase price (usually near zero). This is non-negotiable for protecting your cap table.

Company has right (not obligation) to repurchase unvested shares
Repurchase price = original purchase price or par value
Exercise window typically 90 days from termination
Failure to exercise may result in accelerated vesting
Board approval usually required for repurchase

Critical: Always pair unvested equity with 83(b) elections to avoid tax disasters

Automatic vs. Optional Repurchase

Most agreements give the company an option, not an automatic right. Here's why this matters:

Automatic forfeiture may create securities law issues
Option gives company flexibility based on circumstances
Board can waive repurchase for good performers
Maintains relationship for potential future engagement

Buy-Sell Clauses for Vested Equity

Right of First Refusal (ROFR)

The company and/or existing shareholders get the first opportunity to purchase vested shares before any third-party sale.

Prevents unwanted third parties from joining cap table
Typically 30-60 days to match any bona fide offer
Can be structured as company-first, then shareholders
May include co-sale (tag-along) rights

Call Options on Vested Shares

More aggressive than ROFR - company can force purchase of vested shares upon termination.

Controversial and may reduce talent attraction
Must be at fair market value (or formula price)
Common in professional services firms
Less common in tech startups seeking VC
Consider sliding scale based on tenure

Good-Leaver vs Bad-Leaver Treatment

This distinction is one of the most negotiated terms in equity agreements

Good Leaver Scenarios

Voluntary resignation after minimum tenure (e.g., 2+ years)
Termination without cause
Death or permanent disability
Retirement at normal retirement age
Constructive dismissal by company
Mutual agreement to part ways

Treatment: FMV repurchase, vesting acceleration (partial or full), extended exercise windows

Bad Leaver Scenarios

Termination for cause (fraud, theft, gross misconduct)
Material breach of service agreement
Violation of non-compete or non-solicit
Conviction of felony
Voluntary resignation before cliff
Joining a direct competitor

Treatment: Repurchase at cost basis or discount to FMV, forfeiture of unvested, shorter exercise windows

Repurchase Pricing Methods

Method	Description	Best For	Drawbacks
Fair Market Value (FMV)	409A valuation or independent appraisal	VC-backed startups, departing good leavers	Expensive, time-consuming, disputes possible
Formula Price	Multiple of revenue or EBITDA	Bootstrapped companies, predictability	May diverge significantly from true value
Book Value	Net assets per share from balance sheet	Asset-heavy businesses, simplicity	Often undervalues tech/IP companies
Last Round Price	Price from most recent financing	Recently funded startups	May be stale if years since last round
Cost Basis	Original purchase price paid	Bad leavers, unvested shares	Punitive if company has appreciated
Discount to FMV	FMV minus X% (e.g., 20-30%)	Moderate bad leaver scenarios	Arbitrary percentage, disputes

Valuation Dispute Resolution

Build in a mechanism for resolving valuation disagreements:

Each party selects independent appraiser
If valuations within X% (e.g., 15%), use average
Otherwise, third appraiser breaks tie (baseball arbitration)
Costs split or allocated to losing party

Payment Terms and Installments

Lump Sum vs. Installments

Most agreements allow installment payments to avoid cash flow strain on the company.

Common: 25% upfront, balance over 12-24 months
Interest may or may not accrue on unpaid balance
Acceleration triggers: change of control, new financing
Security interest in shares until fully paid
Promissory note documentation recommended

Payment Caps and Floors

Protect both parties from extreme outcomes:

Cap: Maximum total payment regardless of valuation
Floor: Minimum payment even if company is struggling
Ability-to-pay carve-outs for distressed companies
Subordination to senior debt holders

Death, Disability, and Breach Scenarios

Death of Equity Holder

Shares pass to estate/heirs per will or intestacy
Company ROFR typically applies to estate sale
Consider key person life insurance for buyout funding
Cross-purchase agreements among co-founders
Immediate vesting acceleration often granted

Permanent Disability

Define "disability" precisely (unable to work X months)
Usually treated as good leaver
Partial or full vesting acceleration
Extended exercise periods for options
Disability insurance can fund buyout

Material Breach Scenarios

Breach of service agreement or company policies may trigger bad-leaver treatment:

Specify which breaches qualify as "material"
Require notice and cure period before repurchase
Board determination process with documentation
Consider graduated responses based on severity
Clawback provisions for fraud discovered later

Sample Clause Language

Unvested Share Repurchase Right Upon termination of Service Provider's services for any reason, Company shall have the right, but not the obligation, to repurchase all Unvested Shares at a price equal to the Original Purchase Price ($0.001 per share). Company must exercise this right by written notice within ninety (90) days of termination. If Company fails to timely exercise, Unvested Shares shall be forfeited without payment.

Good Leaver Vested Share Repurchase If Service Provider's services terminate and Service Provider qualifies as a Good Leaver, Company may repurchase Vested Shares at Fair Market Value determined by the most recent 409A valuation, or if more than 12 months old, by an independent appraiser selected by the Board. Payment may be made in up to four (4) equal quarterly installments, with interest at the Applicable Federal Rate.

Bad Leaver Definition "Bad Leaver" means a Service Provider whose services terminate due to: (a) termination by Company for Cause; (b) voluntary resignation before the one-year anniversary of the Effective Date; (c) material breach of the Confidentiality Agreement or IP Assignment; (d) conviction of any felony or crime involving moral turpitude; or (e) violation of any non-competition or non-solicitation covenant. A Bad Leaver's Vested Shares may be repurchased at the lower of (i) Original Purchase Price or (ii) fifty percent (50%) of Fair Market Value.

Valuation Dispute Resolution If Company and Departing Holder disagree on Fair Market Value, each shall select an independent appraiser within fifteen (15) days. If the two appraisals are within 15% of each other, the average shall be the Final Value. Otherwise, the two appraisers shall jointly select a third appraiser whose determination shall be final and binding. Costs shall be split equally unless one party's initial position differs from the Final Value by more than 25%, in which case that party shall bear all appraisal costs.