Modern Counsel for Growing Companies
In plain English
A transaction in which an owner sells all or part of their interest to another owner, the company, or a third party. Price, payment, releases, guarantees, and continuing obligations must be addressed. A desire to leave a business does not automatically create a right to demand a buyout.
Types and key distinctions
Mandatory Buyout
A required purchase or sale of an ownership interest after a defined triggering event. The governing agreement should establish who buys, how value is determined, payment terms, and procedures. Misconduct, departure, or a majority vote does not automatically create a mandatory buyout unless a valid legal basis supports it.
Redemption
A transaction in which a company purchases its own outstanding ownership interest from an owner. It differs from a purchase by another owner or third party. Authority, solvency restrictions, tax treatment, price, and payment terms must be considered; redemption does not necessarily release the seller's personal guarantees.
Fair Market Value
Generally, the price property would command between a willing buyer and willing seller who are informed and not compelled to transact. In an ownership buyout, the agreement may adopt a specific definition or valuation method. Fair market value is not automatically the same as statutory fair value or a fixed contractual price.
Valuation Discount
A reduction applied to an estimated ownership-interest value for a stated reason, such as lack of marketability or lack of control. Its availability depends on the valuation purpose, legal standard, and agreement. It is different from a SAFE conversion discount, which adjusts a financing conversion price.