Legal Considerations in Secondary Sales

Selling private company shares can be more complex than trading public stocks. It’s not just about finding a buyer and agreeing on a price. Several legal considerations can impact the transaction, and it’s important to understand them before you start the process. This wiki page will walk you through the key legal aspects of private company secondary sales.

1-Sentence Takeaway: Secondary sales of private shares involve legal complexities around contracts, company rights, and securities regulations that require careful navigation.

Key Legal Documents & Concepts

• Shareholder Agreement: This agreement outlines the rules governing the ownership and transfer of company shares. Think of it as the rulebook for shareholders. It often includes details about:
  • Right of First Refusal (ROFR): The company and/or existing shareholders may have the right to buy your shares before they’re offered to an outside buyer, often at the same price. See [[Right of First Refusal ROFR Companys Option to Buy Back]].
  • Co-Sale Rights (Tag-Along Rights): These rights protect minority shareholders. If a majority shareholder sells their shares, minority shareholders may have the right to join the sale and sell a proportionate amount of their own shares. See [[Co Sale Rights Tag Along Rights Protecting Minority Shareholders]].
  • Drag-Along Rights: These rights can require minority shareholders to sell their shares if a majority shareholder decides to sell to a third party. See [[Drag Along Rights When You Must Sell]].
  • Lock-up Periods: These define periods when shareholders are restricted from selling their shares, often following a funding round or other significant event. See [[Lock Up Periods When You Cant Sell Yet]].

• Stock Option Agreement (if applicable): If you’re selling stock options, this agreement outlines the terms and conditions of those options, including the exercise price, vesting schedule, and expiration date. See [[Understanding Your Stock Options ISO vs NSO]] and [[Stock Options]].

• Securities Laws: While Earlyasset navigates the complexities of securities laws on your behalf, it’s helpful to be aware that sales of private securities are regulated by both federal and state laws. These laws often require disclosures to potential buyers and may restrict who can buy private shares (e.g., accredited investors). See [[Accredited Investor Who Can Buy Private Shares]].

The Importance of Due Diligence

Due diligence is a critical part of any secondary transaction. Both the buyer and seller should perform due diligence to ensure they understand the terms of the deal and the underlying company. See [[The Role of Due Diligence in a Secondary Sale]] and [[Due Diligence]].

Working with Legal Counsel

While Earlyasset streamlines the secondary process, it’s always wise to consult with your own legal counsel for personalized advice, especially for complex transactions. They can help you understand the implications of your shareholder agreement, stock option agreement, and any other relevant legal documents.

Earlyasset’s Role

Earlyasset’s platform and team are designed to help navigate these complexities. We handle much of the administrative and legal legwork, ensuring a smooth and efficient process. Our team can answer your questions about the process and the relevant legal considerations. See [[Selling Your Shares with Earlyasset The Process]].

So here’s what we covered:

• Key legal documents governing secondary sales (Shareholder Agreement, Stock Option Agreement).
• Important clauses to be aware of (ROFR, Co-Sale, Drag-Along, Lock-up).
• The role of securities laws in private sales.
• The importance of due diligence.
• The value of consulting with personal legal counsel.
• How Earlyasset helps navigate these complexities.