A valuation adjustment mechanism (VAM) has failed — how much must the founder pay?
The compensation amount is governed by the agreement, most commonly structured as “share repurchase plus a fixed return” or “cash compensation”. An important caveat: a VAM entered into with the company itself may be held invalid because it harms the company and its creditors, whereas one entered into with shareholders or the actual controller (the founder) is generally enforceable. The compensation cap should be set reasonably by reference to the valuation, the amount actually invested and the degree of fault.
