> what is the basis for the prohibition on selling shares? How are those prohibitions enforced? If the basis is contract law, then you can't necessarily prevent

> what is the basis for the prohibition on selling shares? How are those prohibitions enforced? If the basis is contract law, then you can't necessarily prevent people from undertaking the prohibited action, can you? Just collect damages if they do. The organizing documents will have language that specifies the right to injunctive relief. That clause can be used by the court as a basis to order you not to complete a contemplated sale. (Obviously, only works if they catch you before it happens.) > If an employee sells their shares in violation of a company contract, what happens? Can the company repossess the shares? Or are the shares structured so that they can be made worthless? The organizing document will specify that shares must be registered and all transfers must be done by filing appropriate paperwork with the company. The company will refuse to process transfers that don't comply with the rules, and refuse to recognize as shareholders anyone who claims to own shares but doesn't have them registered in their name. > Can employees construct a security based on their shares and then sell that instead? ... an asset-backed security. Agreements that prohibit transfers often also prohibit pledging the shares as collateral, which means it couldn't be used to secure a derivative contract (making it asset-backed). But it's difficult to prohibit every possible derivative contract, so if someone really wanted to sell some transfer-restricted stock, I believe it's somewhat doable via this route. If you're interested in learning more about it, look at what SharesPost is up to, from what I understand, they buy exposure to private companies in the form of unsecured derivatives contracts.