Resolving Equity Discrepancies Before Institutional Seed Investment
Pre-seed equity discrepancies are resolved through board-approved share repurchases, voluntary equity surrenders, and binding mutual releases executed before seed funding closing.
reverse stock repurchase
Meaning
Contractual mechanisms allow a company to reclaim unvested shares from a departing founder or employee at a nominal price. A reverse stock repurchase ensures that individuals do not leave with a large portion of the company if they stop contributing early. This right is typically triggered by a termination of service.
Vesting Enforcement
Mechanics of the buyback are governed by the vesting schedule agreed upon at the start. If a reverse stock repurchase occurs, the company pays the original purchase price for the unvested portion. This keeps the equity pool concentrated among active participants.
Exit Protection
Protection of the remaining team members is the primary goal of the provision. A reverse stock repurchase prevents a person who leaves after six months from owning as much as those who stay for six years. This maintains the fairness of the cap table.
Contractual Right
Exercise of the right requires a formal notice and a payment of funds. A reverse stock repurchase is a legal tool that must be used correctly to avoid disputes. The administrative cost is low but the legal stakes are high.
It protects the company from individuals who no longer contribute to the growth of the firm.