> For example, in a U.S. case, Associated Grocers of Maine, Inc., the Bankruptcy Court for the District of Maine ruled that federal bankruptcy law preempted a restriction on the transfer of the debtor's stock, thereby permitting a sale of the stock free and clear of the restriction.
It's a theoretical question, and I'm not trying to be annoying here, just genuinely curious.
If this stock is non-transferable, does that mean it has an inherent value of zero? Does that mean I can file for bankruptcy and still keep the stock? I just feel like the nature of property rights in this country doesn't square with transferability restrictions. :shrug:
Here's the meat of it:
"""
Before shares of common stock of the corporation may Transfer to another prospective holder, such Stockholder must obtain the prior written consent of the corporation upon resolutions duly approved by the Board of Directors, which consent may be withheld by the Board of Directors in its sole discretion.
"""
There are some exceptions like passing it on to your heirs when you die or if the company IPOs.
I'm asking if anyone else has had experience with this.
After talking to several credible people, apparently forward sales are not uncommon even though they do violate the contract. The reason being that (1) the company doesnt have to know about it so (2) they don't need to revalue the company and (3) its not going to be widely available to employees so they can start slacking off. Also (4) they say that a company has never sued an employee over this kind of this and probably will never because it would look bad for the company to sue their own early employee.
So I'm just wondering: who are these people and are they willing to talk about the experience? I'm told that these deals do happen.
Trying to take this in a more constructive direction though: what happens if I go bankrupt? I have no idea how all of that works, but I can imagine a judge saying this limited transferability clause isn't legal or something. How can I go bankrupt when I kinda-sorta own millions of dollars worth of company stock?
>> They are now worth millions of dollars on the open market
> No, they aren't, because there is no open market for private company shares.
I do have offers to purchase my stock. In a bygone era, I could simply instruct the company to transfer my shares and broker the transaction myself.
I get what you're saying though.
The purpose of my post here isn't to complain so much as inquire about people who have executed forward sales and are willing to speak about the experience. From what I understand, this is being done quite a bit and I guess the idea is that company never has to find out...
I think you're assuming that all of this legalese is well-understood beforehand. I was pretty young and new to the startup scene when I joined this company. I didn't know what a 83b election is or a 409a valuation, let alone the terms of limited transferability.
By the time the company was a success, I could either leave the stock on the table or purchase it since it's worth a lot more money than I'm paying for it.
I agree that I'm on the shitty-end of this contract. Chris Voss says people only appeal to fairness when they've got nothing else. lol. And I'm there. I signed up for this and I wasn't knowledgable enough to negotiate my options agreement contract when I joined.
But the fact is, lots of people are probably in this same position. I'm told lots of people execute forward sales and companies don't care because they don't have to report it to the SEC and get another 409a. CEOs also like having a grip on their employees, holding a carrot in front of them to keep performing.
I suspect that at some point, there will be an interesting legal case here. Suppose I were to file for bankruptcy - what happens to these shares? How can I be bankrupt if I still own millions of dollars in company shares?
I'm not expert here, but I'm really curious what this landscape looks like.
Without pasting in the entire two pages, this sums up how locked down the language is:
"""
“Transfer” shall mean with respect to any security, the direct or indirect assignment, sale, transfer, tender, pledge, hypothecation, or the grant, creation or suffrage of a lien or encumbrance in or upon, or the gift, placement in trust, or the Constructive Sale (as such term is defined below) or other disposition of such security (including transfer by testamentary or intestate succession, merger or otherwise by operation of law) or any right, title or interest therein (including, but not limited to, any right or power to vote to which the holder thereof may be entitled, whether such right or power is granted by proxy or otherwise), or the record or beneficial ownership thereof, the offer to make such a sale, transfer, Constructive Sale or other disposition, and each agreement, arrangement or understanding, whether or not in writing, to effect any of the foregoing. "Constructive Sale" shall mean, with respect to any security, a short sale with respect to such security, entering into or acquiring an offsetting derivative contract with respect to such security, entering into or acquiring a futures or forward contract to deliver such security, or entering into any other hedging or other derivative transaction that has the effect of materially changing the economic benefits and risks of ownership. Any purported Transfer of any shares of the corporation's stock effected in violation of this section shall be null and void and shall have no force or effect and the corporation shall not register any such purported Transfer.
"""
I did talk to a lawyer, maybe he wasn't a good one, but my experience is that lawyers tend to be so risk-averse. He basically said "yeah, you can't sell them".
On the other side, these hedge fund people say their lawyers are getting all clever and stuff, but the contract says that even if the company decides to nullify the shares involved in the agreement, I still need to pay them the equivalent dollar value which basically means they're just looking out for themselves...
I believe non-transferability clauses are common these days, ever since some shenanigans with employees selling shares ahead of the AirBnB IPO.
But does it hold up in court? It seems bizarre that I can "own" something and yet have no rights that people typically associate with owning something.
> Startups are risky, options aren’t a guaranteed payday, exercising is gamble, and liquidity events are regulated for a reason. Sometimes you lose money. Have we forgotten this?
I spent around $100k to purchase this stock and paid tax on the gain. They are now worth millions of dollars on the open market, but the company will not allow me to sell them... I understand it's risky, but at this point they just aren't letting me get a payday...
> For example, in a U.S. case, Associated Grocers of Maine, Inc., the Bankruptcy Court for the District of Maine ruled that federal bankruptcy law preempted a restriction on the transfer of the debtor's stock, thereby permitting a sale of the stock free and clear of the restriction.
Makes sense though, honestly