Definition of Clawback
The term Clawback refers to a scheme in which an entrepreneur is allowed to rebuild his or her equity position after a heaviliy dilutive funding round.
Suppose that an entrepreneur's share in a company is diluted down to 2% and the best case scenario for a financial exit is to sell the company for $10 million. The entrepreneur's share in the exit will only be $200,000, which for many talented entrepreneurs or senior managers may not be a very motivating incentive.
In this case, the Board of Directors may put in place a clawback incentive, in which the entrepreneur's equity share increases if they hit certain objectives. Alternatively, a clawback can be given without requiring that any objectives are met.