The fact that people cant buy or sell shares of private companies is ridiculous in general, but particularly in this case.
More seriously: people should comply with the agreements that they sign. Don't sign an agreement that says all of your assets are actually Apple's if you're not happy with it. Read all of the fine print and don't be surprised later.
Don't buy stock in a privacy company if you're not happy with the constraints on it. One of the common key differences between private and public companies is that you can't sell or transfer stock in private companies without their approval. You know that when buying it initially, or when agreeing to receive it as compensation.
There are legitimate reasons why private companies don't want their stock to be transferred willy-nilly. For one, it makes the cap table larger and more complex, which complicates further funding or purchase agreements. Two, if the cap table grows too large, then the company may become subject to onerous SEC regulations that are more appropriate for public companies (but without receiving the corresponding benefits). Three, since shareholders are entitled to certain information about the company, private companies limit ownership so that they're not obligated to share this information with people they do not trust. There are probably more reasons.
You have read every single word of all the TOS you ever signed? I find that very hard to believe.
> Don't buy stock in a privacy company if you're not happy with the constraints on it. One of the common key differences between private and public companies is that you can't sell or transfer stock in private companies without their approval. You know that when buying it initially, or when agreeing to receive it as compensation.
If we talk about the letter of the law, then you don't need to sell the stock, you can sell futures of it at your own compliance. The company can't prevent you from doing that by letter of the law. But the SEC can. The contract is only enforcible in practical terms because as an employee or investor you are disallowed from making any legal claim about the stocks you are entitled to.
Also, the argument that it is 'legal' is entirely a different thing. I never mentioned legality, I said ridiculous. Its not a moral, economic or practical argument to say that something is 'legal'. Saying something is legal is one of the lowest forms of defense for an action. Its saying that the only purpose of it is that they cant put you to jail for doing it.
> There are legitimate reasons why private companies don't want their stock to be transferred willy-nilly. For one, it makes the cap table larger and more complex, which complicates further funding or purchase agreements. Two, if the cap table grows too large, then the company may become subject to onerous SEC regulations that are more appropriate for public companies (but without receiving the corresponding benefits). Three, since shareholders are entitled to certain information about the company, private companies limit ownership so that they're not obligated to share this information with people they do not trust. There are probably more reasons.
Very nice, but there is a much more important reason why companies want to not be able to sell off shares: they benefit economically directly because of it. Because the owners get the shares back when people dont buy them, and they have information asymmetry with the employees. AS an employee you have a lot less information.
If employees could sell their stocks willy nilly, every employee that leaves a startup and doesnt want to buy stock to keep would sell them in the open market, which would dilute the value of companies big time while making employees richer.
Hm.
No. But I do before signing a shareholders’ agreement.
- It's lop-sided, as in they get something for nothing, comparatively speaking. Courts don't see such contracts to be valid.
- It's understood that users mostly don't read ToS, and instead rely on their general understanding of what ToS may contain, plus or minus some deviation. Anything that's way outside reasonable deviations fails the "meeting of the minds" test, and is also held invalid.
The shareholder agreement is a different matter. The investor most certainly is expected to read the agreement, and they do. And both parties are exchanging plausibly valuable things - stock for money.
I'm not a lawyer, this is not a legal advice. Seek professional advice before taking any action based on what you read.
A click-through TOS? No, duh; you knew that when you asked it. But a shareholder's agreement that I put pen to paper for my signature, which is the topic at hand? Umm, the answer to that one would be "yes".
An analysis of this topic: https://www.bu.edu/jostl/files/2016/01/21.1_Alberts_Final_we...
Some crypto offerings (ICOs) might be securities depending on what's promised when purchased. If the creator of a coin advertises their ICO as an investment opportunity, where the buyers can expect to see gains from their investment, due to the labor of others, especially when there's no established market for the coin, then that ICO may be a security.
There's nothing ridiculous about it.
What stops you from doing that is the State. So its actually a rule that can only exist because other things are enforced.
The way I read this they are not "telling them" as much as reminding them that legally they are not allowed to do this.
Shareholders in a Delaware corporation are legally allowed to sell their private shares. The general exemption for this is Regulation D. Most restrictions are of companies’ construction.
Disclaimer: I am not a lawyer. This is not legal nor any other kind of advice.
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?
Can employees construct a security based on their shares and then sell that instead? Nominally the employee retains the shares, and sells a contract based on them to someone else - an asset-backed security. The contract is an option that allows the contract-owner to request the shares-owner sell their shares in the event of liquidity, and the contract owner will receive the gains. Alternatively, the share-owner simply holds onto the shares until they are transferrable (eg IPO). In exchange for this the shares-owner is paid an up front fee.
Presumably this kind of arrangement could also be prohibited in some way by the company, but if someone is willing to violate that agreement, it would be difficult to discover that the agreement exists.
The record of a private company’s shareholders are maintained by the company. If you try to buy shares in a prohibited transfer, the company won’t recognise the change of ownership. Forcing recognition would require the transacting parties to sue the company; this is frowned upon.
That said, yes, companies who block transfers tend to spawn clever financial engineerings. Because of associated legal and banking costs, these structures only make sense for larger trades.
Disclaimer: I am not a lawyer. This is not legal nor any other kind of advice.
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.