Owners of publicly-held companies can sell their equity at any time for the market price. On the other hand, owners in privately-held businesses are often restricted by the company’s organizational documents, contracts and securities laws which prohibit sale to the general public. This difference makes the sale of privately-held equity more complicated. Typically, there are only certain conditions when owners can sell.
Buy-Sell or redemption agreements
Buy-Sell Agreements or Redemption Agreements are contracts that outline the terms on which equity in a business can or must be sold. Often these are put in place when the company is first formed or when a significant equity investment closes. These contracts help with the orderly transfer of ownership, whether it is a planned or unplanned event. Failure to plan for how and when equity can be sold or must be sold can cause unnecessary harm to the business if, for example, a founder or partner leaves, retires, dies or is pushed out.
What these plans address
Each ownership structure is a little different, and specifics depend on the needs of the business and its owners, but they often involve:
- Call rights
- Put rights
- Deadlock provisions
- Rights of first refusal
In the event there are put rights, the company can be forced to buy back equity and to use its funds to meet the purchase obligation. The buy back right is often assignable which means thie company’s other owners or new investors could be brought in to buy out the exiting owners. Companies can purchase key man life insurance policies to provide revenue upon a death or disability that results in an equity buyout. The company pays the premium and is the beneficiary.
They provide a framework to handle disputes
These agreements can be negotiated early on when relationships are strong and they can put mechanisms in place to resolve later conflicts. If buyout terms are defined by contract, protracted negotiations can be avoided. buyout’s terms. Owners should consult with a business law attorney to work through the best particulars for the company and its owners.