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

[stock-throwaway]

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!

[givemeethekeys]

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/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]

> 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.

[biotechbio]

It’s fairly common for private companies to have non-transferability clauses for both options and stock.

IANAL, but this sounds pretty standard and I doubt OP will be able to fight the legitimacy of the claim. Re: a forward sale, sounds like it blatantly violates the agreement and would expose OP to some obvious risks. Agreed OP should talk to a lawyer.

Is anyone else surprised by OP’s indignation? 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?

[dragonwriter]

> 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

OP explicitly says they were an employee and had to exercise options when (implicitly, immediately before) they left not to lose them, so this isn’t an issue of sale to a non-employee.

[bombcar]

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

[dustingetz]

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]

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

[lancewiggs]

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]

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]

Yes. They won't allow it because they don't want existing employees to cash out and stop working hard (or quit)...

[YuriNiyazov]

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

[stock-throwaway]

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. """

[pfannkuchen]

If it’s right of refusal wouldn’t the company have to be willing to buy it in order to prevent the other sale?

[MilStdJunkie]

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.

[yieldcrv]

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]

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.

[faangiq]

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

[BaseballPhysics]

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.

[edmundsauto]

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.

[stock-throwaway]

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.