Transfer restrictions prevent secondary transfers of stock without prior authorization of the Company’s Board of Directors. There are many legitimate reasons that startups would want to block a transfer and keep a tight control over their cap tables. For example:
- If such transfer would be to a potential competitor or other party unfriendly to the company;
- If such transfer would represent a transfer of less than all of the shares then held by the stockholder and its affiliates or is to be made to multiple transferees;
- If such transfer would increase the risk of the company having to register its stock under federal or state securities laws (e.g., having a class of security held of record by 2,000 or more persons, or 500 or more persons who are not accredited investors); or
- If such transfer would result in the loss of any federal or state securities law exemption or otherwise violate securities laws (e.g., if the transfer is facilitated by general solicitation or by a brokered transaction).