Preparing Founder's Common Stock Purchase Agreements

One of the most important documents in the incorporation process is the common stock purchase agreement used to formalize the issuance of shares to a founder of a new corporation and set out various restrictions with respect to transferability of those shares and requirements typically imposed on the founder with respect to his or her continued employment by the corporation as a condition to obtaining the full benefits of share ownership.

Drafting and finalization of such an agreement requires careful consideration of a number of issues, many of which can be quite sensitive to one or more of the founders. For example, a choice may need to be made among various types of consideration for the shares including assignment of intellectual property and other assets. Perhaps most importantly, the founders and their attorneys need to hammer out the procedures for vesting of the founders’ shares based on continued employment with the corporation and decide what other restrictions on transferability of the shares should be included in the agreement.

Once the initial draft of the agreement has been prepared you should forward it to the members of the founding group of the new corporation along with a letter or e-mail that specifically highlights and summarizes the key issues that need to be considered before the agreement is finalized.  In addition, given the length and complexity of these agreements you should strongly recommend setting up a time to discuss each of the provisions in person or in a conference call. You should also make sure that your communication includes clear language directing the founders to seek independent legal advice from their own personal attorney regarding the terms of their proposed purchase and ownership of shares in the new corporation.

Finally, you’ll usually need to prepare a few additional documents to complete the issuance of the shares including a stock power, an acknowledgement and statement of decision regarding Section 83(b) election, an election under Section 83(b) of the Internal Revenue Code of 1986, a receipt for consideration for stock and a receipt for share certificate and consent to escrow.

Examples of all of the agreements mentioned above are available for you to view and use in Business Transactions Solutions on Westlaw Next.

 

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