Making it possible for employees to sell shares without restrictions isn’t an option we advise. It can serve as a distraction: What if all of your employees start keeping daily tabs on the current price per share of their stock? What if they start asking for company information that it doesn’t want to provide and potentially feed to prospective buyers? What if they sell to competitors?
It can also create some unwanted chaos. It can affect the company’s options pricing, it can affect who’s on the cap table, and it can lead to uneven pricing as each individual negotiates separately with what are typically sophisticated financial buyers. Companies are justifiably uncomfortable with all of those things.
So when we talk to companies, we talk about the benefits of broader board control over share transfers.
Historically, the primary protection that companies used to maintain some control over employee share sales has been a right-of-first-refusal (aka, ROFR, pronounced “rofer”) so that the company has the right to step in to repurchase the common shares at a price negotiated by the employee with a third party. This is fine when it’s the occasional individual employee considering a sale.
However, when there’s a really high level of demand for common shares, and a lot of employees willing to sell those shares, a company can’t keep exercising its ROFR. That would just drain cash that’s otherwise earmarked for growth initiatives.
We often advise companies to put in much broader restrictions on the transfer of shares, and indeed this is much more common now. The most notable is that many companies now require board approval for almost any sales of common shares, and that would include transactions like loans secured by the shares and the sale of a call option, future contract or other derivative security based on the underlying shares. That means you can ask the board, but in general, the board just says “no.”