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Comment by JumpCrisscross | Hacker News Reader

The elephant in the room are transfer restrictions. VCs demand their preferred stock trade in the secondary market. At the same time, common stock is locked down. If the common stock is sellable before the company exits, the risk-reward calculus for company equity shifts in employees’ favor.

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How does something like this mesh with selling common stock but the company having right of first refusal?

Say I want to sell common stock that I own, to someone who meets the SEC accredited investor definition. It seems that right of first refusal means that the company could buy the stock instead, but it would have to be at the price that I set with the external investor. In that case, don't I as an employee get liquidity either way, since it's being bought at the agreed upon price?

I learned the hard way that options agreements tend to have additional clauses allowing the company to unilaterally restrict sales. The contract might look like it has a straightforward process for employees to sell, with a company first right of refusal (with the company purchasing the stock instead). But there is usually additional fine print that basically gives the board veto power over any transfer of stock.

Interesting, are you able to share more? Or if you know where I might be able to read more about this?

I'm definitely not an expert on options contracts, but the examples of clauses I've seen are:

(In the options exercise agreement): "All certificates evidencing shares purchased under this agreement shall bear the following legend: "The shares represented hereby may not be sold, assigned, ..., except in compliance with the terms of a written agreement between the company and the registered holder...""

(On the share certificate): "This certificate and the shares represented hereby are issued and shall be held subject to all ... bylaws of the corporation, to all of which each holder ... agrees to be bound"

Either of which seems to give the company the ability to unilaterally reject any transfer/sale of shares.

There are reasons to do this also, as the number of shareholders can trigger reporting requirements even if you are private (jurisdiction dependent, of course).

In my opinion selling within the existing pool shouldn't be restricted, but this could become a sticky issue around board control so that probably contributes to the desire to control/curtail it.

> In that case, don't I as an employee get liquidity either way, since it's being bought at the agreed upon price?

Correct. The problem is a lot of companies go further. They restrict sales completely. In practice, insiders are allowed to purchase at depressed prices in tenders from time to time and then resell at a mark-up in the open markets.

One question to ask when interviewing at a startup is when was the last time someone sold common shares. You can also turn it around and talk with someone at a platform like EquityZen and ask them "I'm negotiating an offer at X; what has you experience been with them?" Some startups make it very easy for people to sell shares, some don't, and some are so small there's no market for the shares.

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