Founding shareholders should work out all of the details between them as early on as possible. Issues that should be considered include: What is the contribution of each shareholder? Must each work full-time? Can a shareholder leave the company to pursue other matters and still retain ownership? What happens if there is a dispute, or a shareholder dies or becomes incapacitated? Can one shareholder sell his shares freely or are there restrictions, like rights of first refusal, to limit the transferability of his shares? Furthermore, care must be taken not to run afoul of Federal and state securities laws.
Documents that address these issues include:
(a) Common Stock Purchase Agreement (with or without Vesting). This agreement allows the founders to document their initial ownership in the company, including securities law transfer restrictions and any vesting provisions with respect to their shares.
(b) Shareholders Agreements. These agreements typically provide for restrictions on transferability of shares and co-sale, drag-along and first right of refusal rights. They may also provide for specific voting restrictions, such as providing for election of specific individuals as directors of the corporation.
(c) Buy-Sell Agreements. The purpose of this agreement is to provide for an orderly transition of ownership interests on the occurrence of specified events. A carefully drafted buy-sell agreement will anticipate potential conflicts that may upset the functioning of a small, closely held entity when an owner desires or is forced to sell his or her interest in the entity. Typically, a buy-sell agreement controls the circumstances under which an owner may sell his or her interest, who is a permitted buyer, and how the price will be determined.
(d) 25102(f) Notice. Companies selling stock must comply with state and federal securities laws. Non-compliance can lead to lawsuits by investors and civil or even criminal prosecution by government agencies. Frequently the offering is structured to fit within exemptions to the laws that generally require registration of the securities. A common exemption for securities sold to founders in California is found in Section 25102(f) of the California Corporations Code.