Designing Reverse Vesting Terms for Common Holders Facing Series A
Reverse vesting subjects fully issued common shares to investor-mandated repurchase options that unvest equity over a renewed service calendar.
cause definition
Meaning
The specific list of contractual conditions under which an employer may terminate a founder or executive without financial penalty or severance obligations. The cause definition outlines the specific misdeeds, such as fraud, gross negligence, or felony conviction, that justify immediate dismissal. This contractual boundary protects the company from paying severance to individuals who have acted against its interests.
These provisions are heavily negotiated during the formation of the initial corporate charter to ensure a fair balance between investor security and founder protection.
Employment Termination
Executive employment agreements must articulate these conditions with precision to avoid costly disputes. When a board invokes the cause definition, the affected executive is stripped of their operational title and duties immediately. The loss of position is accompanied by a reduction in severance benefits and a complete cessation of salary payments.
Equity Forfeiture
Unvested options and shares are routinely reclaimed by the company upon a termination that meets these high standards of misconduct. If the cause definition is triggered, the departing executive often forfeits even vested shares or must sell them back at a steep discount. This loss represents a major drain on the founder’s accumulated financial returns and career investment.
Legal Threshold
Courts scrutinize these provisions closely during subsequent litigation if the dismissed individual challenges the board’s decision. Proof of material harm or intentional wrongdoing is required to sustain the termination under these terms. The high standard of evidence protects the executive from arbitrary dismissal.