Upon completion of agreed-upon impact targets, the investor agrees to forfeit a portion of the investor’s equity. The idea is that a forfeiture of the investor equity results in a relative increase in founder and management equity.
For U.S. investors, the forfeiture could implicate complicated IRS rules related to how certain equity instruments are taxed. See Section 305 Rules. See Sample term sheet: impact equity earnback for an example of terms that increase founder equity.
Sample equity reward language
[For every] OR [Upon completion of [specify impact target], the Company shall have the right to cause the forfeiture of up to [X Preferred Shares] or [X percent of the Preferred Shares], which forfeiture may be structured as a redemption of Preferred Shares at an agreed upon nominal value.