Founders Restricted Stock Purchase Agreement

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Founders Restricted Stock Purchase Agreement

What Is a Founders Restricted Stock Purchase Agreement?

A founders restricted stock purchase agreement is entered into between the founders of a company and the company. Due to the lack of sufficient funds, the owners of a new company are compensated through stocks of such company. In some cases, the founders may also choose to take stocks to consolidate ownership so that when the company goes for an IPO, the amount of shares sold will still be less than the total ownership with the founders.

In a restricted stock agreement, the founders are allotted the shares over a period of time instead of all at once. This is done to get investor approval. Otherwise, investors might not be interested in investing in the company. There is a vesting schedule according to which the stocks are distributed.

When Do You Need a Founders Restricted Stock Purchase Agreement?

A restricted stock purchase agreement is required when the owner of a new company needs to be compensated as an incentive through stocks of the company to continue with the company until it stabilizes. This is done as the founders cannot be compensated in cash due to insufficient funds especially when the company is in its nascent stages.

Besides, to ensure that the investors do not take control over the company at the time of financing, or to ensure that the financiers don’t seek majority control, the company could choose to give the founders a controlling stake in the company. While the agreement is to do so, the allotment will done over a period of time so that the shares of the company have a chance to perform better.

The stocks are given in installments. Investors would not be interested in the company if the founders were given their share in one lot.

Inclusions in a Founders Restricted Stock Purchase Agreement

The following information should be included in a founders stock restriction agreement:

  • Name of the company and the founders
  • The effective date of the agreement
  • The type of stock being held by the founders
  • The restrictions on the transfer of the stock
  • The schedule over which the founders would be paid the stock
  • The duration of restriction on the stock – lockin period
  • Rights of the company for first refusal
  • Assignment of the stock in case of death of incapacity
  • Warranties and representations
  • NDA clauses about the proprietary information of the company
  • Acknowledgement that the founders will not engage in insider trading with the stocks they have
  • Treatment of the stocks if any founder wishes to prematurely exit the company
  • Acknowledgement of compliance with the rules of all federal bodies
  • Option of repurchase of the shares by the company
  • Treatment of repurchase option and release of shares if the services of the founders are terminated within a certain period of the change in control
  • The method of determination of stock price, or deferring to the accountants for determining the options
  • Exceptions to the transfer within family members
  • Termination of the agreement
  • The dispute resolution process including attorney fees
  • Confidentiality clause: No proprietary information should be shared with third parties
  • Rights and obligations of both parties
  • Miscellaneous provisions

How to Draft a Founders Restricted Stock Purchase Agreement?

Sample founders restricted stock purchase agreement may be referred to when drafting an agreement and then the required additions or modifications can be made. Here are the points to remember while drafting:

  • Eligibility: All parties to the agreement must be of legal age and competent to contract
  • Governing Law: The agreement should be drafted according to the laws of the state
  • Dispute resolution clause: The jurisdiction of the dispute
  • Non-disclosure: Confidential information should not be shared
  • Terms of the agreement: The terms should be fair to all parties to the agreement
  • Termination clause: Premature termination of the agreement through a notice
  • Separate page for the signature of parties to the agreement
  • The lockin period of the stock
  • Exceptions made for transfers to the family members
  • Right of the company to exercise first refusal
  • Restriction on transfer of unreleased shares
  • The right of determination of the stock option and who has that right

Benefits of Founders Restricted Stock Purchase Agreement

Some benefits of the founders’ restricted stock purchase agreement are

  • It ensures that the founders remain with the company until the end of the lockin period
  • It ensures that the transition of the company is smooth from founders to a management
  • It builds up the confidence of the investors because these investors invest looking at the founders
  • Vesting creates ownership among the founders so that no founder may leave the company
  • Restricting the stock means any unvested shares can be bought back by the vesting founders
  • It ensures that the founders are adequately compensated for the efforts they put into building the company

Key Terms/Clauses in Founders Restricted Stock Purchase Agreement

The key terms or clauses in the agreement are as follows:

  • Recitals: The purpose of the agreement
  • Transfer restrictions: Restriction on transfer and conversions, legend, conversion rights and consent of the spouse
  • Representations and warranties of the founders: Due authorization, no conflicts, required filings and consents
  • Miscellaneous: Termination, waivers, specific performance, notice, expenses, governing law, submission to jurisdiction, amendment, delays or omissions, counterparts
  • Vesting schedules
  • Company’s right of repurchase for unvested shares
  • Release schedule of the shares over time

What Happens in Case of Violation?

When you violate the agreement, the legal remedies available to the injured party would be:

  • Money Damages including lost profits in case of total breach of contract
  • Cancellation of the contract under the rescission
  • Formation of a new contract under reformation
  • Specific Performance: Money damages are not accepted, and the other party has to fulfill the contractual obligation

Sample for Founders Restricted Stock Purchase Agreement

A sample of the agreement can be downloaded from below.

Founders Restricted Stock Purchase Agreement

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