Clawback
A provision allowing the company to reclaim previously paid compensation under certain conditions.
Definition
A clawback provision allows a company to reclaim previously paid compensation, including exercised stock or vested equity, under specific circumstances. Common triggers include employee misconduct, breach of non-compete or non-solicitation agreements, or restatement of financial results. Clawbacks are more common in executive compensation packages and public company RSU plans, but some startup equity plans include them.
Why it matters
If your equity plan has a clawback provision, the company could theoretically require you to return shares or cash under certain conditions. Review your equity agreement to understand if any clawback terms apply and what triggers them.
Example
An executive receives $1M in vested RSUs. The company later discovers the executive violated their non-compete by sharing proprietary information. The clawback provision requires the executive to return the $1M in shares or equivalent cash value.