Buy-Back Clause
Also called: Share Buy-Back · Repurchase Right
A buy-back clause gives the company (or other shareholders) the right to repurchase a departing shareholder's shares — commonly on employment termination, death, or breach of the shareholder agreement. It keeps ownership within the intended group rather than passing to unrelated third parties.
In more detail
Without a buy-back mechanism, a departing founder or employee-shareholder can retain their equity indefinitely, potentially creating an ownership structure the remaining team never intended — an inactive shareholder with the same rights as active, contributing ones.
The valuation mechanism is the clause's most contested element: fair market value determined by an independent valuer, a formula based on the last financing round, or a discounted "bad leaver" price are all common approaches, each producing very different outcomes for the departing party.
Good-leaver and bad-leaver distinctions (see: leaver provisions) typically apply here too — a shareholder who leaves on good terms usually receives fuller value than one who leaves in breach of their obligations or is terminated for cause.
A co-founder leaves the company after two years, before full vesting. Under the buy-back clause, the company can repurchase their unvested shares at the original issue price — a "bad leaver" outcome — rather than the shares’ current, much higher market value.
What our lawyers check
- Whether a buy-back right exists, and who holds it (company, other shareholders, or both)
- The valuation mechanism, and whether it's objective or open to dispute
- How good-leaver and bad-leaver status affects the buy-back price
- The timeline for exercising the buy-back right and completing payment
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
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