Dear SaaStr: I Have Some Shares in a Successful Start-Up I Worked At, But the Company Won’t Let Me Sell Them. Why Not??
Many ex-employees, as well as angel and seed investors, find themselves in a situation where they are unable to sell their shares in a successful startup. This is a common issue that is not widely discussed. But why do startups and scale-ups prevent individuals from selling shares when there are potential buyers interested in purchasing them?
#1. Controlling the Ball / Captable
One reason for restricting share sales is to maintain control over the cap table. A loose cap table full of unknown individuals can create challenges for the company, such as demands for information, meetings with management, and other complications. Keeping the cap table tight makes it easier to manage the startup.
#2. Costs — Hard and Soft
Processing a share transfer can be costly, both in terms of hard costs (legal fees) and soft costs (additional demands and changes). Silicon Valley law firms typically charge high fees for share transfers, making the process expensive and time-consuming.
#3. Unfair to Current Employees
Allowing ex-employees to sell shares while current employees are unable to do so can create a sense of unfairness within the company. The secondary market for shares may be thin, making it easier for former employees to sell in random deals while current employees are left without the same opportunity.
#4. General Trend to Concentrating Economics In Those Who Stay
There is a growing trend to reward those who stay with the company with more economic benefits compared to those who have left. This trend is observed in various industries and is starting to become more prevalent in U.S. startups.
#5. Legal Telling You Not to Do It
Legal considerations also play a role in restricting share transfers. Securities laws and other reasons may prevent companies from allowing share sales that are not necessary. Legal advice often discourages unnecessary transfers for various reasons.
#6. Tender Offers Are Better, But Can Be Expensive Too
Formal tender offers, where everyone can sell shares in a structured process, are a better option for share sales. However, the cost of executing a tender offer can be high, with legal fees and other expenses adding up quickly. Despite the cost, tender offers are still worth considering.
One personal story highlights the complexities of selling shares in a startup. Despite receiving an offer to buy shares at a significant markup, the buyer requested a diligence call with the CEO of the company before closing the deal, adding an unexpected hurdle to the process.
(image from here)
