7 ms·

Ask HN: Have you used a forward sale to avoid stock transfer restrictions?

I was an early employee at a reasonably successful startup company, and I have found myself in an awkward position. I have millions of dollars worth of stock that the company is not allowing me to sell citing transfer restrictions specified in the stock options agreement. I have multiple offers to buy my stock but the company won't allow a stock transfer. It feels like such a hypocrisy, I "own" literally millions of dollars of stock which I had to purchase when I left yet I am not allowed to sell it. I've heard people mention that a "forward sale" is one way to get around this – they buy the shares now for a certain price and I transfer the shares later whenever it is possible. It seems like this would constitute a violation of the stock option agreement, but I'm also told that a company would never sue an employee to take their shares away because "that would look bad". So I'm just curious, has anyone done this? How do you feel about the risk? I'm also just generally curious about the history / legality of transfer restrictions if anyone has any insights. Thanks!

sgtnoodle 3y ago
In this case, it seems like your best bet is to consult with a lawyer. Have you tried asking the company to arrange a sale with a current investor that's interested in investing more?
- stock-throwaway 3y ago
  Yes. They won't allow it because they don't want existing employees to cash out and stop working hard (or quit)...
  - sgtnoodle 3y ago
    A decent private company that's doing well would be smart to periodically offer stockholders a tender offer, just so that they can enjoy some liquidity before they keel over. When companies do that, there's usually a restriction that prevents selling more than, say 10% of one's holdings.
bombcar 3y ago
You need to consult a lawyer. This can be worked around but it may be moderately complicated and depends on the wording.
deleted 3y ago
[deleted]
BaseballPhysics 3y ago
No disrespect intended, but with respect to this charge of "hypocrisy": you knew what you were doing when you exercised those options. You had vested options in a privately held company. I assume you chose to leave, forcing you to exercise those options or give them up. When exercising those options you had to know full well you were taking a gamble that you wouldn't be able to exit from your position. That's a choice you made. So no, there's nothing unfair or hypocritical about this in the slightest. That's the risk of choosing to buy stock in a private entity, and it's a risk you take when joining a startup: the possibility that you might not get an exit, or the timing might be wrong for you personally.
- urfullofsht 3y ago
  [dead]
- edmundsauto 3y ago
  That line of thought also means the employee should take every legal avenue to execute the letter of the contract. It might be legal but it’s a difficult situation - nobody wants to feel like they are in a contentious relationship with their employer.
  - BaseballPhysics 3y ago
    > That line of thought also means the employee should take every legal avenue to execute the letter of the contract. Yes. They should. Exercising a large number of options is rarely a cheap financial decision. It is absolutely necessary to go into it clear-eyed with a complete understanding of what you're getting into because in doing so you are locking up potentially significant capital. And this isn't some weird edge case situation. This is something anyone exercising options in a private company needs to deal with.
  - dragonwriter 3y ago
    > nobody wants to feel like they are in a contentious relationship with their employer. Being in a contentious relation with your employer is the normal state under capitalism (and it being an ex-employer doesn’t necessarily cure that); no one wants to feel mortal, either, but not wanting to feel something doesn’t make it less true.
dustingetz 3y ago
i would go to startup biglaw with this (e.g. Gunderson) they will have seen this before and know what to do, expect 15-20k in fees but you’re selling millions right?
- toomuchtodo 3y ago
  This is the path. Have your attorney review your options agreement to understand what the transfer restrictions are and how to get around them (if necessary). A forward contract might be a possibility depending on OP’s options agreement and the risk appetite of the counterparty who is interested in your shares. As for counsel, I recommend George Grellas. Have worked with him before and had a good experience. https://news.ycombinator.com/user?id=grellas https://news.ycombinator.com/user?id=grellas
  - stock-throwaway 3y ago
    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...
    - toomuchtodo 3y ago
      Not legal or investing advice. If you can find a counterparty willing to perform a forward contract with a non recourse instrument (you owe them nothing if the shares turn out to be worthless), that might be a transaction worth investigating, depending on how much of a discount you’re willing to take due to unmarketability of the securities and your time horizon (liquidity now vs liquidity later). In current state, the securities are worthless (due to possible transfer restrictions). Your objective is to figure out how to make them worth something to someone.
draw_down 3y ago
[dead]
faangiq 3y ago
Definitely worth doing for millions. HNW banker might be able to arrange also.
YuriNiyazov 3y ago
What's the exact language in the agreement? is it a "Right of First Refusal" ? Something else?
- pfannkuchen 3y ago
  If it’s right of refusal wouldn’t the company have to be willing to buy it in order to prevent the other sale?
  - YuriNiyazov 3y ago
    No, if I understand right of first refusal correctly, it works like this: You have a buyer. You present to the company that you have a buyer (eg, contract + check deposited in escrow). The company either has to buy the equity from you (at same or better price, depending on how the contract is written) or they have to let the sale to the other buyer go through.
    - sgtnoodle 3y ago
      I think you two are saying the same thing.
      - pfannkuchen 3y ago
        Right, it sounded like the company was refusing to buy while still somehow also preventing the sale. If it was just a right of refusal agreement presumably the OP would not have any problem, since they don’t seem to have any reason to care who buys the shares as long as someone does.
- stock-throwaway 3y ago
  This isn't a FOFR - it's much more than that. 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. """
givemeethekeys 3y ago
OP: I read your message a couple of times over and am assuming that you own the millions in stocks outright (and not options). I'm also going to assume that, you're asking us for advice because you don't have the cash to pay a lawyer for a couple of hours of their time ;) In this case, I suggest reading the OG literature: https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144 https://www.sec.gov/reportspubs/investor-publications/invest... Find out if the state where your company is registered has rules that'll help you learn one way or another. Personally, I think it's very fishy that a company would be allowed to sell a non-employee shares that they can't resell to someone else - I suspect that language in the options agreement is illegal. Perhaps it is possible to sell your shares to the people "as is" - make it their problem, along with a full disclosure of the original options / stock sale agreement. In any case, you'll need a competent lawyer's help in interpreting the options agreement, and the resale agreement, since the company is still private, so uhh... find the money to pay a lawyer.
- BaseballPhysics 3y ago
  > Personally, I think it's very fishy that a company would be allowed to sell a non-employee shares that they can't resell to someone else - I suspect that language in the options agreement is illegal. This is absolutely wrong. First, you're assuming they weren't an employee but they likely were when they exercised their options. Most likely they chose to leave and had vested options they had to either exercise or give up. It's quite a common situation and one I've personally witnessed. Second, non-transferrance clauses for shares in private companies is quite common.
  - stock-throwaway 3y ago
    To clarify, yes I own the shares outright. 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.
    - 3y ago
yieldcrv 3y ago
I know a lawyer that accomplished this with a trust I’m not sure the details but somehow it was possible to effectively transfer the shares low key and receive payment
- toomuchtodo 3y ago
  Typically, your boilerplate startup options agreement allows for a one time transfer into a trust for estate planning purposes. Theoretically, the trust beneficiary would then be updated from the options recipient to their investor counterparty.
  - yieldcrv 3y ago
    yes, trusts can have any instruction set with no public filing, and swapping the beneficiary being the simplest aspect good to know this kind of transfer is already permitted, I wondered about that
  - stock-throwaway 3y ago
    That interesting. Ironically I did create a personal trust and they never got back to me on transferring ownership to my trust.
MilStdJunkie 3y ago
Lawyer up yesterday. This whole thing smells like it's designed for someone to be holding the bag. My first and only experience in the startup world was made up entirely of crap like this. I got real tired of practically needing counsel to figure out my compensation.
lancewiggs 3y ago
Others have talked about your legal (just no) and not-so-legal (a quiet side agreement) avenues. Another approach is to try to push the issue harder with the controlling shareholders and Board. Perhaps get together with your peers who also have non-transferrable stock, and even with the founders if they are in the same boat. If there is enough demand for sale, especially from current staff who are critical to the business, then you have a lot more bargaining power with the Board/lead investors. Meanwhile if you can really get enough people (or $) interested in buying shares then the amounts at stake will be increasingly be material enough for the Board to take notice. Smart investors would allow the shares to be traded (as secondaries), as keeping staff and former staff happy is smart long term. Not allowing trading devalues also the value of new options being issued to current staff, and I've seen later stage smarter firms blow up these rules and allow for share sales.

sgtnoodle 3y ago

In this case, it seems like your best bet is to consult with a lawyer. Have you tried asking the company to arrange a sale with a current investor that's interested in investing more?

stock-throwaway 3y ago
Yes. They won't allow it because they don't want existing employees to cash out and stop working hard (or quit)...
- sgtnoodle 3y ago
  A decent private company that's doing well would be smart to periodically offer stockholders a tender offer, just so that they can enjoy some liquidity before they keel over. When companies do that, there's usually a restriction that prevents selling more than, say 10% of one's holdings.

bombcar 3y ago

You need to consult a lawyer. This can be worked around but it may be moderately complicated and depends on the wording.

deleted 3y ago

[deleted]

BaseballPhysics 3y ago

No disrespect intended, but with respect to this charge of "hypocrisy": you knew what you were doing when you exercised those options. You had vested options in a privately held company. I assume you chose to leave, forcing you to exercise those options or give them up. When exercising those options you had to know full well you were taking a gamble that you wouldn't be able to exit from your position. That's a choice you made. So no, there's nothing unfair or hypocritical about this in the slightest. That's the risk of choosing to buy stock in a private entity, and it's a risk you take when joining a startup: the possibility that you might not get an exit, or the timing might be wrong for you personally.

urfullofsht 3y ago
[dead]
edmundsauto 3y ago
That line of thought also means the employee should take every legal avenue to execute the letter of the contract. It might be legal but it’s a difficult situation - nobody wants to feel like they are in a contentious relationship with their employer.
- BaseballPhysics 3y ago
  > That line of thought also means the employee should take every legal avenue to execute the letter of the contract. Yes. They should. Exercising a large number of options is rarely a cheap financial decision. It is absolutely necessary to go into it clear-eyed with a complete understanding of what you're getting into because in doing so you are locking up potentially significant capital. And this isn't some weird edge case situation. This is something anyone exercising options in a private company needs to deal with.
- dragonwriter 3y ago
  > nobody wants to feel like they are in a contentious relationship with their employer. Being in a contentious relation with your employer is the normal state under capitalism (and it being an ex-employer doesn’t necessarily cure that); no one wants to feel mortal, either, but not wanting to feel something doesn’t make it less true.

dustingetz 3y ago

i would go to startup biglaw with this (e.g. Gunderson) they will have seen this before and know what to do, expect 15-20k in fees but you’re selling millions right?

toomuchtodo 3y ago
This is the path. Have your attorney review your options agreement to understand what the transfer restrictions are and how to get around them (if necessary). A forward contract might be a possibility depending on OP’s options agreement and the risk appetite of the counterparty who is interested in your shares. As for counsel, I recommend George Grellas. Have worked with him before and had a good experience. https://news.ycombinator.com/user?id=grellas https://news.ycombinator.com/user?id=grellas
- stock-throwaway 3y ago
  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...
  - toomuchtodo 3y ago
    Not legal or investing advice. If you can find a counterparty willing to perform a forward contract with a non recourse instrument (you owe them nothing if the shares turn out to be worthless), that might be a transaction worth investigating, depending on how much of a discount you’re willing to take due to unmarketability of the securities and your time horizon (liquidity now vs liquidity later). In current state, the securities are worthless (due to possible transfer restrictions). Your objective is to figure out how to make them worth something to someone.

draw_down 3y ago

[dead]

faangiq 3y ago

Definitely worth doing for millions. HNW banker might be able to arrange also.

YuriNiyazov 3y ago

What's the exact language in the agreement? is it a "Right of First Refusal" ? Something else?

pfannkuchen 3y ago
If it’s right of refusal wouldn’t the company have to be willing to buy it in order to prevent the other sale?
- YuriNiyazov 3y ago
  No, if I understand right of first refusal correctly, it works like this: You have a buyer. You present to the company that you have a buyer (eg, contract + check deposited in escrow). The company either has to buy the equity from you (at same or better price, depending on how the contract is written) or they have to let the sale to the other buyer go through.
  - sgtnoodle 3y ago
    I think you two are saying the same thing.
    - pfannkuchen 3y ago
      Right, it sounded like the company was refusing to buy while still somehow also preventing the sale. If it was just a right of refusal agreement presumably the OP would not have any problem, since they don’t seem to have any reason to care who buys the shares as long as someone does.
stock-throwaway 3y ago
This isn't a FOFR - it's much more than that. 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. """

givemeethekeys 3y ago

OP: I read your message a couple of times over and am assuming that you own the millions in stocks outright (and not options). I'm also going to assume that, you're asking us for advice because you don't have the cash to pay a lawyer for a couple of hours of their time ;) In this case, I suggest reading the OG literature: https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144 https://www.sec.gov/reportspubs/investor-publications/invest... Find out if the state where your company is registered has rules that'll help you learn one way or another. Personally, I think it's very fishy that a company would be allowed to sell a non-employee shares that they can't resell to someone else - I suspect that language in the options agreement is illegal. Perhaps it is possible to sell your shares to the people "as is" - make it their problem, along with a full disclosure of the original options / stock sale agreement. In any case, you'll need a competent lawyer's help in interpreting the options agreement, and the resale agreement, since the company is still private, so uhh... find the money to pay a lawyer.

BaseballPhysics 3y ago
> Personally, I think it's very fishy that a company would be allowed to sell a non-employee shares that they can't resell to someone else - I suspect that language in the options agreement is illegal. This is absolutely wrong. First, you're assuming they weren't an employee but they likely were when they exercised their options. Most likely they chose to leave and had vested options they had to either exercise or give up. It's quite a common situation and one I've personally witnessed. Second, non-transferrance clauses for shares in private companies is quite common.
- stock-throwaway 3y ago
  To clarify, yes I own the shares outright. 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.
  - 3y ago

yieldcrv 3y ago

I know a lawyer that accomplished this with a trust I’m not sure the details but somehow it was possible to effectively transfer the shares low key and receive payment

toomuchtodo 3y ago
Typically, your boilerplate startup options agreement allows for a one time transfer into a trust for estate planning purposes. Theoretically, the trust beneficiary would then be updated from the options recipient to their investor counterparty.
- yieldcrv 3y ago
  yes, trusts can have any instruction set with no public filing, and swapping the beneficiary being the simplest aspect good to know this kind of transfer is already permitted, I wondered about that
- stock-throwaway 3y ago
  That interesting. Ironically I did create a personal trust and they never got back to me on transferring ownership to my trust.

MilStdJunkie 3y ago

Lawyer up yesterday. This whole thing smells like it's designed for someone to be holding the bag. My first and only experience in the startup world was made up entirely of crap like this. I got real tired of practically needing counsel to figure out my compensation.

lancewiggs 3y ago

Others have talked about your legal (just no) and not-so-legal (a quiet side agreement) avenues. Another approach is to try to push the issue harder with the controlling shareholders and Board. Perhaps get together with your peers who also have non-transferrable stock, and even with the founders if they are in the same boat. If there is enough demand for sale, especially from current staff who are critical to the business, then you have a lot more bargaining power with the Board/lead investors. Meanwhile if you can really get enough people (or $) interested in buying shares then the amounts at stake will be increasingly be material enough for the Board to take notice. Smart investors would allow the shares to be traded (as secondaries), as keeping staff and former staff happy is smart long term. Not allowing trading devalues also the value of new options being issued to current staff, and I've seen later stage smarter firms blow up these rules and allow for share sales.