Have you ever thought about selling your stake in a startup? Has your company just cracked a million in revenue or has your unicorn turned into just another run of the mill pony? People can choose to sell their stake in a startup for a variety of reasons. However, it is important to follow the correct procedures to protect yourself from liability. A shareholders’ agreement usually defines the procedure for sale. You should also consult a business lawyer if you are unsure of your obligations. Therefore, this article will explore how shareholders in a company can go about selling their stake within a startup.
Methods For Selling Your Stake
A person can dispose of their shares in a startup in several different ways. The most common method will be the resale of shares to other members of the company. This sale is known as a secondary sale. This is distinguished from a “primary” sale. A primary sale allows a company to issue new shares to investors, and the proceeds of that sale go directly into the company. A secondary sale is a preferred method in which venture capital firms will dispose of their shares. The reasons for secondary sale may include the supply/demand of the stock and liquidity of the shares. Parties that may also be interested in the sale of your shares include new investors, VC firms, and investment banks. Therefore, consider all options when preparing to sell a stake in a startup.
Provisions Of a Shareholders agreement relating to the sale of shares
Before you consider selling your stake in the startup, consult your shareholders’ agreement. A shareholders’ agreement defines the rights of shareholders‘ and comes into effect when executed. Each agreement should contain a provision relating to the exit or disposition of shares. A shareholders’ agreement should include a provision that clearly defines the process of exit. Always consult a lawyer to ensure that you follow the correct procedures of sale. This consultation protects you from liability and provides a smooth transition as you exit the company. Hence, always consult the actual text of your shareholder’s agreement before providing notice to dispose of your shares.
Important Questions that need to be Asked when Selling a Stake in a Startup
When reading your shareholder’s agreement, some essential questions should be considered before you initiate the sale of a stake in the startup. Understanding these issues may be the difference between a smooth transition and legal action. For example, does the provision allow you to terminate at will, or is there a process that you need to follow? There may be a period where the parties have to stay together after notice of the exit. If the parties can terminate at will, this may create a sense of constant threat within the organisation. Consider what your exit strategy will be? Furthermore, the exiting party needs to consider how the assets will be treated and valued at termination? Separating a party’s contribution to the company can be a complicated process. It is also essential to seek independent financial advice to ensure the assets are objectively valued
Exit clauses which can affect the sale of a stake in a startup
It is also essential to consider some of the standard exit clauses that exist when selling a stake in the startup. The right of refusal/offer clause is one of the most basic exit clauses. These clauses suggest that if you want to sell your shares, you first must offer to sell them to the other shareholders. This preferences other shareholders before third parties. Similarly, a put/call option requires the sale to other shareholders (‘the call option’) or to purchase other shareholders’ shares (‘the put option’). A Shotgun clause ensures that the sales of shares have to occur at a specific price. There may also be some restrictions on transfer, which may prevent you from selling your shares to different companies or at certain times.
Know your rights
While it can be tough to leave something you have built, it is often the reality of business. A secondary sale will often be the most appropriate way for you to sell a stake. Always read your shareholders’ agreement and the various terms relating to the sale. Consult a business lawyer if you do not understand any of your obligations.
