Share Transfer Provisions for Startups

In preparing a stockholder agreement or operating agreement for a startup (for a corporation or LLC, respectively) with multiple owners, the section of the agreement that generally requires the most thought and discussion with the client relates to share transfers.  While it’s possible to punt on all of these questions by having the agreement simply say that no transfers are permitted except as may be agreed by the owners, it’s advisable to at least consider the various scenarios and include appropriate provisions in the agreement.  The following are some common ones:

    • Permitted Transferees – Share transfers may be made to related persons (like a trust for the benefit of a family member) without consent of the company or other owners.
    • Right of First Refusal/Offer – With a right of first refusal (ROFR), if an owner receives an offer from a third party to purchase the owner’s shares, the owner must first offer to sell the shares to the company or existing owners on the same terms.  A right of first offer (ROFO) requires the owner to first solicit offers from the company or existing owners, and then the owner can sell to a third party if a deal is not reached.

Share Transfer Provisions | Andrew Abramowitz

  • Tag-Along (or Co-Sale) – If one owner is selling shares to a third party, other owners have the right to sell a proportional amount of their shares to the third party on the same terms.
  • Drag-Along – If the owners of a majority of the shares want to sell the whole company to a third party, the remaining owners are compelled to sell also on the same terms.
  • Buy-Sell Provisions – These provisions compel owners to sell their shares, or buy another owner’s shares, when a triggering event occurs.  For example, if an owner terminates her employment with the company, she can be required to sell her shares back to the company.  The key question in preparing these provisions is to determine what the appropriate purchase price is (i.e., fair market value, price paid by the owner, some formula based on company financial results).