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I might sound stupid, but how is it that a company can put restrictions on sales of it's stock after those slices of ownership are already allocated and granted

I might sound stupid, but how is it that a company can put restrictions on sales of it's stock after those slices of ownership are already allocated and granted to individuals?

tptacek 16y ago
One common way is to make a contract term stating that the company gets first refusal (at a minimal valuation) on all sales as a condition of exercising the option. Employees with private company shares have very few actual rights; this is almost part of what defines "private companies". It's not a stupid question. There are a lot of misconceptions about employee startup stock; it is, to an extent greater than commonly imagined, really just a glorified profit sharing plan.
Bricejm 16y ago
This is the same as any large company giving equity but requiring a vesting period. The reason you give equity vs. cash is to create an incentive for an employee to want their company to succeed. If the large transfer fees are in place to limit shareholders so they can stay under the 500 mark then it's a bit shady. If your shares are vested per the agreement you signed, it should be your right to sell when you want to without a substantial fee.
- tptacek 16y ago
  Not so. Your (hypothetical) employee stock agreement, which you were required to sign as a condition of being issued stock options, stipulates that your shares are not transferable, intended for personal investment and not resale, and that your exercise of those options is conditioned on a series of terms that ensures the company can prevent you from selling them. The reason for this is that your (hypothetical) company isn't trying to create a broad market of investors in its equity. Rather, it's trying to express an incentive that allows employees to share in the upside of a liquidity event at the company. This issue is distinct from vesting. Even after you've vested, the company is unwilling to yield control of who owns its shares. The company is fine with you parting ways and retaining your upside interest (in fact, it's happy you did!), but not fine with you selling the package that gives you that interest. For obvious reasons, the story is totally different at public companies.
  - ojbyrne 16y ago
    The story is also different if you're issued restricted stock, rather than options.
    - tptacek 16y ago
      I think (from other comments) you're implying that ISO/ESO options are contractually non-transferable (and can't be executed by non-employees), but that no similar contract governs actual restricted shares. Not convinced this is the case; with restricted stock, your shareholder's agreement probably allows the company to keep you from selling your shares.

I might sound stupid, but how is it that a company can put restrictions on sales of it's stock after those slices of ownership are already allocated and granted to individuals?

tptacek 16y ago

One common way is to make a contract term stating that the company gets first refusal (at a minimal valuation) on all sales as a condition of exercising the option. Employees with private company shares have very few actual rights; this is almost part of what defines "private companies". It's not a stupid question. There are a lot of misconceptions about employee startup stock; it is, to an extent greater than commonly imagined, really just a glorified profit sharing plan.

Bricejm 16y ago

This is the same as any large company giving equity but requiring a vesting period. The reason you give equity vs. cash is to create an incentive for an employee to want their company to succeed. If the large transfer fees are in place to limit shareholders so they can stay under the 500 mark then it's a bit shady. If your shares are vested per the agreement you signed, it should be your right to sell when you want to without a substantial fee.

tptacek 16y ago
Not so. Your (hypothetical) employee stock agreement, which you were required to sign as a condition of being issued stock options, stipulates that your shares are not transferable, intended for personal investment and not resale, and that your exercise of those options is conditioned on a series of terms that ensures the company can prevent you from selling them. The reason for this is that your (hypothetical) company isn't trying to create a broad market of investors in its equity. Rather, it's trying to express an incentive that allows employees to share in the upside of a liquidity event at the company. This issue is distinct from vesting. Even after you've vested, the company is unwilling to yield control of who owns its shares. The company is fine with you parting ways and retaining your upside interest (in fact, it's happy you did!), but not fine with you selling the package that gives you that interest. For obvious reasons, the story is totally different at public companies.
- ojbyrne 16y ago
  The story is also different if you're issued restricted stock, rather than options.
  - tptacek 16y ago
    I think (from other comments) you're implying that ISO/ESO options are contractually non-transferable (and can't be executed by non-employees), but that no similar contract governs actual restricted shares. Not convinced this is the case; with restricted stock, your shareholder's agreement probably allows the company to keep you from selling your shares.