TLDR:
A shotgun clause (or buy-sell clause) is a provision in shareholder agreements allowing one shareholder to offer to buy out another at a set price, with the recipient having to either accept the offer or buy out the initiating party at the same price.
Shotgun Clause Variations
The standard shotgun clause requires the initiating party to offer a price per share, after which the receiving party must either buy the initiating party’s shares at that price or sell their shares to the initiating party at that price. Variations include the ‘Russian Roulette’ (the receiving party can choose which side of the transaction to take), the ‘Dutch Auction’ (parties submit sealed bids and the highest bidder wins), and the ‘Escalation Clause’ (parties alternately increase bids until one side declines).
Shotgun clauses can create significant problems when partners have very different financial resources. A wealthier co-founder can set a low price, knowing the less-wealthy co-founder cannot afford to buy them out and will be forced to sell. This asymmetry is why some partnership agreements modify the standard mechanism to include financing rights or valuation floors tied to independent appraisals. Founders considering including shotgun clauses should carefully analyze how the mechanism would operate given each founder’s financial situation.