• Vesting of Founder’s Stock. Founders may agree that their interest in the stock of the company will “vest” over time (typically 1-3 years), and grant to the company the right to acquire any unvested stock when the Founder’s service with the company ends.

• Termination. The agreement may define the circumstances in which a Founder’s service with the company can be terminated. If termination is for “cause” (i.e. bad acts by the Founder), the company and/or the other Founders may have a right to purchase some or all of the terminated Founder’s stock in the company (including vested stock).

• Restrictions on Transfer of Founder’s Stock. Founders typically agree not to transfer their shares in the company without the consent of the other Founders, except in limited circumstances such as transfers to specified persons (ex. children or spouse) or for estate planning purposes. Founders often grant to the company and/or the other Founders a right of first refusal to purchase any shares proposed to be transferred by a Founder, except as permitted by the agreement.

• Tag-along Rights. Founders may grant each other the right to participate in any sale of a Founder’s shares to a third party. Any potential purchaser of stock from a Founder would then be required to purchase shares held by all Founders, usually pro rata based on the Founders’ relative ownership interest.

• Voting of Founder’s Stock. Founders often agree to vote all of their shares to elect specified individuals (usually including each Founder) to the company’s Board of Directors.

• Non-competition. Founders sometimes agree not to compete with the business of the company or solicit employees or customers for a certain period of time following the end of their service with the company.

While these provisions are common, a Founders Agreements should be customized to fit the needs of the Founders. Your lawyer can help you create an agreement that’s right for you and your company.

To understand the importance of accredited investors, it is necessary to first understand that a primary goal of the U.S. securities laws is to reduce the possibility that ordinary people will lose their shirts by investing in dodgy companies. This is accomplished in part by requiring that companies provide to potential investors – even to friends and family of a company’s principals – detailed information about the company’s operations and finances, as well as the risks inherent in the company’s business. This information must be provided in a written document (called a private placement memorandum or “PPM”) that can take significant time to prepare and generally requires careful review by the company’s lawyers and accountants. Complying with the disclosure requirements would therefore be cost-prohibitive for companies seeking to raise small amounts from outside investors if not for the fact that the SEC relaxes the disclosure requirements in limited circumstances, including when companies sell only to accredited investors.

A person or entity is “accredited” if he/she/it falls within one of the categories of investors set forth in the definition of “accredited investor” found in Rule 501 of Regulation D, which was adopted pursuant to the Securities Act of 1933. These categories attempt to get at whether an investor has sufficient knowledge and skill to evaluate the risks of a potential investment. For a natural person to be accredited, he or she must be a director, officer or general partner of the issuer or must have, at the time of purchasing securities, either (a) individual net worth, or joint net worth with the person’s spouse, in excess of $1,000,000 or (b) individual income in excess of $200,000 in each of the two most recent years or joint income with the person’s spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year.  [UPDATE: The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law July 21, 2010, provides that individuals may not include the value of their residence in determining  if their net worth exceeds the $1,000,000 threshold for being an accredited investor and requires that the SEC periodically review and update the net worth and income thresholds for accredited investors.]

Because accredited investors are considered better able to fend for themselves, Regulation D permits companies to sell to an unlimited number of accredited investors without requiring that they furnish the information that must be provided to non-accredited investors; provided that the company is available to answer questions from potential investors and provide to them, upon request, the same kind of information that would have to be provided to non-accredited investors, and that the offering also complies with the other applicable restrictions on the scope and manner of the offering. This can save a company thousands of dollars in legal and accounting fees, as well as the time necessary to prepare a PPM. We should point out that the rules of Regulation D allow companies to offer and sell securities to anyone, including friends and family, if applicable restrictions are met; however, if you want the cost savings afforded by streamlined disclosure requirements, then before offering securities to your Aunt Bertha, you’ll want to make sure she’s accredited.

One note of caution: in determining what information to provide to potential investors, it is important to remember that even when offering securities only to accredited investors pursuant to Rule 506, a company is still obligated to comply with the SEC’s anti-fraud rules (we’ll discuss these in a future post), which generally make it illegal to make a misstatement or omission of a material fact in connection with an offering of securities, as well as with any applicable state securities laws. Your legal adviser can help guide you through the intricacies federal and state securities laws.