What are Repurchase Options and Rights of First Refusal?

In another installment of “What’s in my contract,” we look at a couple of stock purchase agreement provisions – IE the agreement which defines how and when you get your stock from the startup you either founded or work for.

Repurchase Option

This provision allows the startup to buy back, or repurchase, unvested stock if a co-founder or employee leaves before receiving all of his stock.  The need for this provision is actually relatively intuitive and procedural.  Otherwise, what happens to the unvested shares once the employee or co-founder leaves?  The employee or co-founder has set them aside, but doesn’t technically own them subject to vesting.  This provision prevents the stock from slipping through a corporate crack.

The way this provision functions, however, is slightly counterintuitive.  It will typically be phrased as the co-worker or employee’s shares “being released from the repurchase option.”  This indicates that the repurchase option is the status quo and where the stock is held in the interim, and stock vesting merely serves to lift the restrictions from the shares.

The startup repurchases the unvested stock at the price the co-founder or employee paid, which is typically the par value – fractions of a cent per share.

Right of First Refusal

This provision gives the startup the right to purchase any shares an employee or co-founder wants to sell to any third party.  In other words, the employee or co-founder cannot sell his shares to anyone else without offering them to the startup first.  Here’s the process:

  1. The co-founder or employee must give written notice to the startup of his intent to sell stock, and also include the proposed third party buyer, the number of shares to be sold, and the purchase price the buyer offered.
  2. The startup can, within 30 days of the written notice, elect to buy the offered shares for the price the buyer offered.
  3.  If the startup elects to not buy the offered shares, the co-founder or employee can sell the shares to the third party buyer within 120 days of the written notice.

Of note, there is also a first right of refusal provision that appears in investor term sheets.  It works slightly differently, and allows the investor to purchase newly issued shares from the startup in order to prevent dilution.

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