venture-capitalLet’s say a founder agrees to a standard ratchet provision. He then leaves the company. His successor accepts a huge down round that would have triggered the ratchet provision.
Does the founder owe any money? Or is he free from liability simply by leaving the company?
I am not a lawyer, but based on my personal experience this will clearly depend on the terms of the contract. If we assume that the founder has a received shares (not options) then that person will be subject to the terms that cover all of the shareholders, unless it is specified otherwise in the documents.
If the huge down round was intentionally done to wipe someone out, then that could be grounds for litigation. (I’ve seen vindictive behavior like this, and it can get ugly.) A corporation has an obligation to maximize the value of the shareholders.
As far as owing money, I thought typically a ratchet provision reduces the value of your shares but doesn’t cause you to owe money? Perhaps you could post the actual provision so you can get a more detailed answer?
And obviously consult a lawyer on this! :)
Your question is unanswerable in its current form.
A proper answer would include an analysis of the language of all the relevant agreements and contracts in force in the matter. It is important to see the actual contracts themselves and not just a characterization of the contracts as being standard.
To fully appreciate the last point in the above paragraph, read about the case of the million dollar comma.
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