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Ask HN: Have you used a forward sale to avoid stock transfer restrictions?
19 points by stock-throwaway on May 21, 2023 | hide | past | favorite | 61 comments
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!




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.


> 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.


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.


Well, it might seem weird to you, but unfortunately it's not.

Private company shares aren't furniture. They aren't physical property and they don't come with traditional resale rights.

In buying those shares you signed a contract that came with stipulations. One of those stipulations is that you cannot transfer ownership to anyone else. It's perfectly normal and very common.

I just hope you're not realizing this for the first time, now, after you already laid out the capital to exercise those options.


Do you think this is common knowledge though?

I'm pretty sure all YC companies have limited transferability clauses now.

And with the rise of IPO-scale private fundraising, it's possible that a company can remain private literally forever.

This changes the calculus for a young person considering joining early at a startup and I'm not sure that is a good thing for the startup ecosystem.


Honestly, I know the horse is waaay out of the barn for you, but anyone considering laying out 100k+ on an asset should consult a lawyer and/or an accountant and just assume they don't know shit.

You don't need "common knowledge". You just need to know enough to know you don't know and need to consult folks who do.

> And with the rise of IPO-scale private fundraising, it's possible that a company can remain private literally forever.

Disagree.

Investors always want an exit. They don't put cash in out of the goodness of their hearts.

Yes they're willing to wait a lot longer and put up a lot more cash, but ultimately they're looking for their 10x, and that means an IPO or acquisition.

That said, speaking for myself, it was over ten years from founding to exit. So yeah, you gotta be prepared to wait a while if you opt for equity over base pay.


Investors don't have transfer restrictions on preferred shares!!

Only employees have transfer restrictions because they have common shares.

Investors can sell on secondary markets whenever they want, and for the company in question -- they are!


And for smaller preferred equity holders (e.g. founders, angels, etc) yeah, they have that option.

I may be wrong, but to my knowledge any significant investor isn't getting liquidity through those private markets. That's all done through traditional bespoke financial transactions. In fact, that's literally what an acquisition is.


I disagree. If you're a private company, it means that you don't owe anyone outside your company details on your financial performance, and that your shares aren't floated.

But if you, the private company, sold a percentage of your property to someone, then that someone most definitely has the right to sell their shares to someone else. You the private company still don't have to disclose your financials to anyone.

I think any non-transferability agreement is pure bullshit. I feel bad that OP has to now fight to get whats already his.


> I think any non-transferability agreement is pure bullshit.

I feel that way about a lot of things. For example, I feel like forced arbitration clauses should be unenforceable.

But what I feel and what is legal aren't the same things, and when laying out a huge chunk of capital, it's important to understand the difference.


Yeah, I think you're correct about that part. Perhaps rights were signed away - lawyers rejoice.


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?


> 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...


> 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.

You have a private company valuation you can base the share price on, but that's it. And even that is typically based on black magic and accounting tricks since, at the risk of repeating myself, there's no open market in which those shares are trading and thus no method for price discovery.

And any theoretical transfer of ownership would occur in a private transaction or on a private marketplace that specializes in matching buyers and sellers in private company shares.

<chopped this bit out since the dead horse is beaten>

Edit: And to provide something a bit more constructive, here: unless some lawyer comes up with something clever--and certainly it's worth exploring your options--my bet is your only real move is to just hold onto those shares and wait.

Eventually there may be a liquidity event--probably an acquisition--and hopefully you'll net out positive. You basically bought a 100k lottery ticket. I suspect all you can do now is move on and hope it pays off.


>> 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...

Edit: formating


> I spent around $100k to purchase this stock and paid tax on the gain.

Yes, that’s how options exercises work.

> They are now worth millions of dollars on the open market, but the company will not allow me to sell them...

But you were prrsumably aware of that limitation when you entered into the agreement under which you purchased them (if you dispute that that is the agreement you agreed to, thebmn, definitely, you need a lawyer.) So, even insofar as you describe the “open market” accurately, that market isn’t open to you.

> I understand it's risky, but at this point they just aren't letting me get a payday...

Perhaps not. Are they obligated to let you get a payday? Is it in their interests to do so? If neither of those is the case, why do you expect they would?


Yes, you're totally right.

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?


> Trying to take this in a more constructive direction though: what happens if I go bankrupt?

If that is an important real consideration, you should consult an attorney; my general understanding, whixh yoi should not rely on, is that non-transferrability clauses mostly are not enforceable in bankruptcy, with some particular exceptions.


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:


I used ChatGPT so who knows if this is true but:

> 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


If it is permissible to sell in bankruptcy, then I don't see why it wouldn't be permissible to sell to buy a new car.


Its not “permissible”; asset sales in bankruptcy aren’t permissive, they are compulsory.

The governments power to compel sale to resolve bankruptcy trumps your counterparty’s right to limit the sale.


> If this stock is non-transferable, does that mean it has an inherent value of zero?

The value of stock comes from the claim against the assets in the case of dissolution, the ability ot sell in the market just enables one to realize that value without the company dissolving in whole or (as by issuing dividends) in part.


> Is anyone else surprised by OP’s indignation?

I absolutely am, and got downvoted for saying so.


> 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.


When they left, they had a certain amount of time to exercise. So, it needn't be that they were still with the company when they exercised the options.


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


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?


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


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...


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.


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.


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?


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


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.


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


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. """


So, assuming that the section prohibits transfer without approval (you left out that part), the agreement explicitly includes a forward contract, so what you are looking for is advice on how to break the contract without getting caught, right?


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.


They happen.

The company has no mechanism for determining that a person has entered into a contract unless someone tells them. Prohibitions on transfers prevent the cap sheet from growing, and the company from getting marked to market when they don't want to. Also makes it easier to create golden handcuffs.

There is always a nonzero chance that the deal falls through because the you are the first to get sued and lose their shares. If it were me, I'd want the contract to eliminate my liability in that scenario. If it were to happen, the buyer would very likely litigate on their own behalf rather than lose the shares that they paid for. These contracts are much more of a negotiation than a straightforward asset purchase on a stock exchange.

Tl;dr the options agreement is a private contract and so is the forward sale. If you're going to enter a forward contract and take hundreds of thousands or millions of dollars, you need a competent lawyer to scrutinize the contract and limit your downside liability. Then it's up to you and the buyer if the risk/reward is worth it.


Maybe paste some more. The giant definition of Transfer is fine, and then it says “you can’t transfer unless it’s according to the rules of this section”

So what are the rules of the section? The definition is not the rules.


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.


Ok.

So, who at the corporation did you actually get a refusal from? Did you manage to get a resolution in front of the board somehow?


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


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.


I think you two are saying the same thing.


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.


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.


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


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.


That interesting. Ironically I did create a personal trust and they never got back to me on transferring ownership to my trust.


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


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


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.


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.


> 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.


> 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.


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.


Honestly, I do feel for you, if only because I was fortunate enough, when I was young and in a similar position, to have a mentor I could talk to who took me through some of the important concepts. As a result, I understood the gamble I was taking and could make the decision with reasonably complete information.

One thing I will say: if you get the chance, be that mentor to someone else in the future. You may be stuck learning an expensive lesson, but hopefully you can prevent someone else from doing the same some day.


A different topic entirely but: how did you find a mentor / someone to mentor? That relationship has always been curious and elusive to me


Alas, I wish I had good advice here, but honestly, I just got extremely lucky.

When I first got hired (at a very small startup) the hiring manager was an utterly brilliant former Bell Labs guy who'd made his way through a couple of prior startups, and he served as a mentor of mine for many many years after.




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