Penalties can be used to hold management accountable for failure to adhere to mission-related agreements or failure to meet minimum impact performance targets. Penalties are most often written as default provisions, which provide investors with the right to recall their capital.
Typically, investors will be reluctant to enforce default provisions, and will instead view them as a last resort after dialogue has failed. Nonetheless, because default remedies can be severe, companies should pay close attention to language that triggers a penalty. Companies and investors may agree on aggressive impact goals, but set a more conservative standard for the purposes of determining when penalties are triggered. ITP does not advocate for the use of these terms but simply intends to catalog them as part of its impact incentives research to date.
Entrepreneurs should also pay special attention to “cure periods,” which allow time for corrective action without penalty, and the process for dispute resolution. Setting up an impact governance body can provide a forum for resolving disputes. See Impact committee or director.