Why a Repurchase Option Matters to Startups
Most founders are concerned about making sure each of the co-founders are invested in the company. Founders often ask about protecting against a co-founder leaving the company, taking his or her equity, and sharing in the potential future upside value of the startup without continuing to work for that right. To protect against this, startups often have a “repurchase option” to buy back shares from the departing founder.
When Can the Company Exercise the Repurchase Option?
While terms can vary, the shares issued to the founders are often subject to a vesting schedule that requires the founder fulfill certain obligations—e.g. to stay with the company a period of time, achieve certain milestones, or any other creative requirements the founders agree on— in order to “vest” in their shares. These unvested shares are commonly referred to as “restricted stock,” since the shareholder’s ownership is “restricted” in the sense that they must fulfill certain obligations to have complete ownership of those shares. To “vest” simply means that the shares are no longer subject to a repurchase option by the company. Typically the repurchase option is triggered by the founder leaving the company, at which point the company would be able to buy back any “unvested” shares that were issued to the founder.
Investors Care About Repurchase Options Also!
Most investors require that the founders (and other key employees) are on vesting schedules to protect against a founder leaving the company shortly after the investor pours money into the company. For most startups, the initial value of the company is tied to the team of founders and the IP they’ve created. Investors want to make sure to protect against founders leaving and taking their equity and IP with them. Repurchase options incentivize founders to stay with the company and continue to develop its products for at least a couple of years.