# How to Determine the Purchase Price for Shares from a Departed Founder
When a founder departs from a startup, one of the most critical and often complex issues that arise is determining the purchase price for their shares. This process can be fraught with emotional and financial implications, making it essential to approach it with a clear, structured strategy. Here’s a comprehensive guide on how to determine the purchase price for shares from a departed founder, tailored for SaaS companies.
## 1. Understand the Legal Framework
### Founders’ Agreement
The first step is to review the founders’ agreement or any other relevant legal documents. These agreements often contain clauses that outline the process for buying back shares from a departing founder. Key elements to look for include:
– **Vesting Schedules**: Determine how many shares the founder has vested.
– **Buyback Rights**: Check if the company has the right to repurchase shares and under what conditions.
– **Valuation Method**: Some agreements specify how the shares should be valued.
### Shareholder Agreements
In addition to the founders’ agreement, review any shareholder agreements. These documents may contain additional provisions regarding share transfers, rights of first refusal, and valuation methods.
## 2. Determine the Valuation Method
### Fair Market Value (FMV)
Fair Market Value is a common method used to determine the purchase price of shares. FMV is the price at which the shares would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
#### Methods to Determine FMV:
– **Comparable Company Analysis**: Compare your company with similar companies in the market.
– **Discounted Cash Flow (DCF)**: Project future cash flows and discount them to present value.
– **Precedent Transactions**: Look at recent transactions involving similar companies.
### Book Value
Book value is another method, which is based on the company’s balance sheet. It calculates the value of the company’s assets minus its liabilities. While this method is straightforward, it may not reflect the true market value, especially for high-growth SaaS companies.
### Negotiated Price
In some cases, the purchase price can be negotiated between the departing founder and the remaining shareholders or board members. This method allows for flexibility but requires both parties to agree on a fair price.
## 3. Engage Professional Valuators
Given the complexities involved in valuing shares, especially in a SaaS company, it’s often wise to engage professional valuators. These experts can provide an unbiased assessment and ensure that the valuation complies with legal and regulatory standards.
### Types of Professional Valuators:
– **Certified Public Accountants (CPAs)**: Specialize in financial analysis and valuation.
– **Business Valuation Experts**: Focus specifically on valuing businesses and shares.
– **Investment Bankers**: Can provide insights based on market conditions and trends.
## 4. Consider Tax Implications
The purchase price of shares can have significant tax implications for both the departing founder and the company. It’s crucial to consult with tax advisors to understand these implications fully.
### Key Tax Considerations:
– **Capital Gains Tax**: The departing founder may be subject to capital gains tax on the sale of their shares.
– **Company Deductions**: The company may be able to deduct certain expenses related to the buyback.
– **Tax Compliance**: Ensure that all transactions comply with local tax laws and regulations.
## 5. Document the Transaction
Once the purchase price has been determined, it’s essential to document the transaction thoroughly. This includes drafting a share purchase agreement that outlines all terms and conditions of the buyback.
### Key Elements of a Share Purchase Agreement:
– **Purchase Price**: Clearly state the agreed-upon price for the shares.
– **Payment Terms**: Outline how and when payment will be made.
– **Representations and Warranties**: Include any representations and warranties made by both parties.
– **Confidentiality Clauses**: Protect sensitive information related to the transaction.
## Conclusion
Determining the purchase price for shares from a departed founder is a multifaceted process that requires careful consideration of legal, financial, and tax implications. By understanding the legal framework, selecting an appropriate valuation method, engaging professional valuators, considering tax implications, and thoroughly documenting the transaction, SaaS companies can navigate this complex process effectively. This structured approach ensures fairness for all parties involved and helps maintain stability within the company during transitional periods.