Sample Format of Stock Agreement

Narendra Kumar

17 Jun, 2019

What is Stock Agreement?

Stock Agreement is a written agreement or instrument putting forth the restrictive terms of a stock i.e.a stock that is subject to standard transfer restrictions for private company stock and repurchase or forfeiture. The two focal points of entering into restricted stock agreements are

1. Understanding among the founders of a startup, or
2. At the insistence of the investors.

Restricted Stocks thus may be transferred only upon fulfillment of certain conditions mentioned in the agreement mostly that includes a continuous Service for a specific time period which is known as the Vesting Schedule

What Are The Advantages Of A Stock Agreement?

The Stock Agreement is considered to be a practical agreement so as to ensure the security to the investors who consider a company to be a vehicle of income and profits. For the founders, the company is an investment in the dreams. The bailing out of one founder is usually considered to be a necessity and also to ensure equal participation in the growth of the company.

Founders use restricted stock to ensure that every founder continues to contribute to the corporation. The founders thus impose restrictions upon themselves as per a vesting schedule and a Restrictive Stock Agreement, so that the first right to repurchase the stock lies with the company.

The investors prefer such agreements to safeguard their concerns that the founders don’t bailout from the company because an investor is putting its funds into the founders. Thus investors shall consider it in their interest that the founders continue to contribute to the company and will then demand a vesting schedule.

What Clauses Are Included The Stock Agreement?

1. The names of the parties: the Company and the Grantee, and the authorized representatives.
2. What number of shares of the Company’s common stock is being restricted
3. What are the transfer restrictions? Example: no sale, pledging, assignment, exchange or transfer in any manner whatsoever
4. What is the time period decided for the vesting schedule- specific months to be decided upon?
5. What is the restriction of forfeiture upon the restricted stock?
6. In which cases shall the above-mentioned forfeiture restriction stand lapse? Example: the death of the grantee or change or control.
7. A clause to mention the provision of issuance of a Stock certificate which shall contain the terms of the restrictive stock and be submitted to the prescribed authority. The pre-requisites to be fulfilled according to the laws may also be mentioned therein.
8. What remains the right of the stockholders? Example: the right to vote and monetary benefits shall not be affected by the stock agreement
9. What shall be the fair share value of the share?
10. What are the tax withholding provisions?
11. What remain the powers of the compensation committee of the board directors? Example: the decision as to the fair market value of the shares
12. If the beneficiary can be appointed or not by the Grantee, if yes, then what is the procedure?
13. Who are the successors of the Grantee and the Company?
14. What shall be the procedure for amending the agreement? Example: only in writing when agreed by the parties mutually
15. Which laws shall govern the agreement and the disputes that may follow in the future?
16. A clause mentioning that the parties shall be binding to the terms of the agreement and any modifications made in future by the parties mutually.

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