Buy-back right

The repurchase right is a right that can be stipulated during a capital investment in a company, which provides the former owners and founders with the opportunity to buy back their sold share of the business under certain conditions.

During the venture capital investment process, typically in the in syndicate agreements, the parties can agree on the creation of a buyback right. This means that within a specified period of time, the original owner can buy back his share of the business under pre-determined conditions.

In the course of venture capital investment, guarantees are recorded in the term sheet or in the in-syndicate agreements for the investor, so that he can have sufficient influence on the operations and decisions of the target company. Such collateral can be the stipulation of sell rate or buy rights or other rights, such as the appointment and recall of senior officials, the right to veto decisions. 

The repurchase right can extend to a period of 5 years, but the parties can freely determine its period within this period. When repurchasing, the price is based on the original sell rate value, but in addition, the investor can also demand compensation for the increase in value that occurred after the purchase. In the case of repurchase rights, which are typically described in the exit strategy, they often agree on a fixed yield for annual periods. Therefore, if the target company wants to buy back the share of the business that was sold after 1 year, it will pay a return of, for example, 10 percent on top of the sell rate price.

In order to maintain the motivations of the founders even after the investment, the venture capital investors often recommend a gradual share buyback program called "vesting". In practice, this means that in the beginning the founder loses a larger share of his ownership and gradually regains it in proportion to time or in relation to performance indicators. On the other hand, if you leave the startup business prematurely, you will lose your ownership of it.