Stock Related Agreements: Restrictions on Transfer
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
When dealing with stock-related agreements, there are plenty of important items that founders need to keep track of. One of these items comes in the form of restrictions on transfer.
What are restrictions on transfer as they relate to stock agreements? When dealing with a private company, any stock certificates will prominently display a statement saying in essence, these securities and the certificate are not freely transferable. In the security laws of the United States and even within each state itself, if someone buys a stock in a private transaction, he/she can not freely transfer any of those shares to a third party. Cara Stone has other blogs on the nature of equity that you should consult to get the hang of this concept. For the founder or anyone coming into the company and acquiring shares, shares can’t simply be sold to someone else for a profit. Without going into much detail about security laws, companies must be aware that selling shares in this way is 100% legally restricted. If someone turns their back to flip shares for profit by selling them to another party, they may be breaking security laws.
How does the factor in to stock related agreements?
- The agreements and share certificate must explicitly say that these shares are not transferable, leaving them illiquid. The holder is holding them and he/she can’t freely transfer them to third parties.
- There are other restrictions on transfer that founders may want in place. For example, the company should have the right of first refusal. If a transfer becomes legally permitted, or if it is approved by the company, then the person that wants to transfer those shares should have to first offer them to the company. If the company doesn’t want to buy them, then the purchase must be brought before the other shareholders.
- Companies need a 180-day lockup in place. This is a provision that ensures that people are going to work together in an IPO process. If the company does very well and is able to IPO, it’s important that everyone doesn’t go and dump their stock as soon as the IPO closes, or “becomes effective”. To prevent investors dumping their shares all at once, almost every stock-related agreement issued by the company will have a 180-day lockup provisions.
I hope sheds some light on restrictions on transfer that need to be in stock-related agreements from the beginning. In every single stock-related agreement throughout the company’s life cycle, these key policies will be crucial.
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
When dealing with stock-related agreements, there are plenty of important items that founders need to keep track of. One of these items comes in the form of restrictions on transfer.
What are restrictions on transfer as they relate to stock agreements? When dealing with a private company, any stock certificates will prominently display a statement saying in essence, these securities and the certificate are not freely transferable. In the security laws of the United States and even within each state itself, if someone buys a stock in a private transaction, he/she can not freely transfer any of those shares to a third party. Cara Stone has other blogs on the nature of equity that you should consult to get the hang of this concept. For the founder or anyone coming into the company and acquiring shares, shares can’t simply be sold to someone else for a profit. Without going into much detail about security laws, companies must be aware that selling shares in this way is 100% legally restricted. If someone turns their back to flip shares for profit by selling them to another party, they may be breaking security laws.
How does the factor in to stock related agreements?
- The agreements and share certificate must explicitly say that these shares are not transferable, leaving them illiquid. The holder is holding them and he/she can’t freely transfer them to third parties.
- There are other restrictions on transfer that founders may want in place. For example, the company should have the right of first refusal. If a transfer becomes legally permitted, or if it is approved by the company, then the person that wants to transfer those shares should have to first offer them to the company. If the company doesn’t want to buy them, then the purchase must be brought before the other shareholders.
- Companies need a 180-day lockup in place. This is a provision that ensures that people are going to work together in an IPO process. If the company does very well and is able to IPO, it’s important that everyone doesn’t go and dump their stock as soon as the IPO closes, or “becomes effective”. To prevent investors dumping their shares all at once, almost every stock-related agreement issued by the company will have a 180-day lockup provisions.
I hope sheds some light on restrictions on transfer that need to be in stock-related agreements from the beginning. In every single stock-related agreement throughout the company’s life cycle, these key policies will be crucial.
