What is a forfeited share?
When investors fail to pay the call money on time or violate other purchase agreement terms, the company can cancel or forfeit their shares. This is called share forfeiture, and it requires the approval of the board of directors. Shareholders who forfeit their shares will lose the money they invested in them. This means they cannot get back the amount they paid for the equity. Sometimes, shares are forfeited when employees leave a company that gave them stock options.
How Forfeited Shares Work
Let's say Naman wants to buy 1,000 shares of a company. He has to pay 25% of the price upfront and another 25% every year for three years. The company decides when he has to pay each year. But if David misses a payment, the company can take back all his 1,000 shares, and Naman would lose all the money he had already paid.
Employee Share Forfeiture
Some companies have a perk for their employees where they can buy the company's stock at a lower price than the market value. But this perk also has some limitations. For instance, the employees may have to wait for a certain duration of time before selling or transferring the stock they bought.
Moreover, if an employee leaves the company too soon, he might have to give up any shares he bought. But if an employee stays with the company long enough, he can own his shares fully and sell them whenever he wants.