Lock-in Period

Explaiantion: Founders shares are normally subjected to a lock-in period. During this time, they are not allowed to sell or transfer their shares to any third party. In case the founder decides to leave the company before the expiry of the lock-in period they must sell their shares at face value to existing shareholders or their shares go to ESOP Trust as may be decided by the Investors.

How it applies to Startup/Investor and its impact: The reason to include a Founder lock-in clause in term sheet is to ensure that founders remain invested and dedicated to the business and therefore are restricted from selling or transferring their shares for the stipulated period.

Thought, the intention of the Lock-in is to ensure that Founders remain invested and dedicated to the business, it becomes an hurdle for them as they cannot take any decision of transferring or selling their shares during this period. Therefore, to avoid such situations, Founders generally ask for some percentage of shares to be unlocked on the day they enter into an agreement with the Investors. Further, they also negotiate for certain threshold of shares say around 4-5% to remain unrestricted to meet any emergency situations or contingencies.

Investors, on the other hand looks into the long-run perspective as to what will happen if Founder’s die or is suffering from inability that hampers his decision making power (Good-Leaver Situation) or has committed fraud or misconduct (Bad-Leaver Situation). So they negotiate how thier shares is to be treated in case any of such situation occurs.

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