Glossary - Clawback Provision
A clawback provision is a contractual clause typically included in private equity or venture capital agreements that allows investors to take back a portion of the money or share profits under certain conditions. This term can be used to ensure the management or portfolio companies meet specific performance criteria, or to recover bonuses or profits distributed to managers in the case of fraudulent activity or significant downward adjustments in profit calculations.
Also known as
- Take-back provision
- Recoupment clause
Use cases examples
- Venture Capital Limited Partnership Agreement: The clawback provision in the agreement allows the limited partners to reclaim a portion of the general partner's carried interest if the fund does not achieve a certain benchmark return.
- Executive Employment Contract: The contract includes a clawback provision that mandates the executive to repay any bonuses or incentives received based on financial results that are subsequently restated due to compliance issues or misconduct.
Considerations for investors
- Investors should consider the enforceability of clawback provisions, especially in different jurisdictions, to ensure they can protect their interests.
- Set clear, achievable benchmarks for clawback triggers to maintain trust and motivation among the management teams or founding members.
Considerations for founders
- Founders should understand the triggers for clawback provisions and negotiate thresholds that are fair and aligned with their ability to influence outcomes.
- Be aware of how clawback provisions might affect company valuation and the distribution of profits in exit scenarios.
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