Evaluating Restricted Stock Repurchase Options in Non-Cause Founder Departures
Corporate repurchase options on unvested stock execute at original cost upon non-cause exits, while vested share buybacks require fair market value.
board discretion valuation
Meaning
Board determination of share price performed by directors in the absence of a market event. Under a board discretion valuation, the governing body reviews internal metrics and comparable data to set a strike price or buyback value. This method applies primarily to private firms where public trading does not provide a continuous price signal.
It ceases to be the primary metric once a qualified financing round or public offering establishes an external market price.
Director Responsibility
Members of the board must act in good faith when determining what a share is worth. They look at revenue, cash flow, debt levels and recent secondary sales to arrive at a figure that satisfies fiduciary duties. This task requires significant attention and hours from directors who must justify their math to shareholders and tax authorities.
Internal Limit
Valuation occurs on a periodic basis or during specific buyback windows. If the board fails to update the price, the company risks using stale data that misrepresents the actual worth of the equity held by founders. The board discretion valuation governs the cost of exiting a seat when a founder decides to sell back their stake before a major exit.
Pricing Logic
Calculation starts with a baseline from the most recent investment. Directors then apply a discount for lack of marketability to reflect the difficulty of selling private shares.