For founders in life sciences and other technology companies, the cap table is fragile by design. Stock is more than a piece of paper, it carries ownership and control over the company. Who holds those shares matters not just to you, but to your investors, licensing partners and even regulators.
If stockholders were free to sell to any outside party, you could find yourself with a competitor, or worse, an unpredictable entity holding influence over your company's future. Transfer restrictions in stockholders' agreements serve as the firewall, protecting founders of closely held corporations from unwanted transfers and keeping ownership aligned with the company's mission.
What Is a Stock Transfer Restriction?
A stock transfer restriction is a contractual clause inside your stockholder agreement that limits how, when or to whom shares in your company can be sold or transferred. In most closely held corporations, especially in life sciences and other technology sectors, these restrictions stop the wrong parties from landing on your cap table.
Types of Stock Transfer Restrictions
There are different types of transfer restrictions in stockholders' agreements, and each one is designed to block a specific kind of risk. We'll break these down in the sections that follow.
Consent-Based Transfer Restrictions
The first type of transfer restriction we need to look at is the kind that blocks any transfer of stock unless the board of directors, or sometimes the majority of preferred stockholders, gives written consent.
If your company is sitting on unpublished clinical trial data, early IP filings or pre-IND-stage assets, letting stock move freely between outside parties can create risks that no licensing partner or investor wants to inherit. Consent-based restrictions solve this by giving the company's leadership a direct veto over disruptive or unqualified transferees.
That said, most stockholder agreements include carveouts that allow certain transfers without consent, typically when the transfer doesn't change the company's control structure or violate securities laws. These carveouts are often limited to:
- Transfers to family members or trusts for estate planning
- Transfers to controlled affiliates
- Internal restructurings (such as a founder moving shares into a revocable living trust)
These carveouts keep the company protected while avoiding unnecessary friction in legitimate, low-risk transactions
Preemptive Rights on Transfers
While consent-based transfer restrictions stop a transfer unless approved by the board or preferred stockholders, preemptive rights give the company and its existing stockholders a more surgical tool: the right to intervene before shares can be sold to an outsider. Two types of preemptive rights appear frequently in stockholder agreements for life science and other technology companies:
- Right of First Refusal
("ROFR")
A ROFR kicks in after a stockholder finds a buyer. Before the deal can close, the company (or in some cases the other stockholders) has the right to step in and purchase the shares on the same terms. If the ROFR is exercised, the outside buyer is cut out. Read our guide to how ROFRs shape ownership and control in stockholder agreements. - Right of First Offer
("ROFO")
A ROFO works before a stockholder can shop their shares. They must first offer them to the company. Only if the company passes can the stockholder take the shares to the open market.
In practice, these rights keep control inside the company, giving founders and trusted investors the first opportunity to retain ownership when someone wants to exit.
Co-Sale and Forced Sale Rights
Some transfer restrictions don't block a sale or require the company to approve it. Instead, they regulate how that sale happens, especially when one stockholder is looking to cash out. These clauses become active during a proposed transfer and exist to preserve fairness, protect alignment, and ensure clean exits in closely held corporations.
There are two common forms of co-sale and forced-sale rights in stockholder agreements:
- Tag-Along Rights (Co-Sale
Rights)
Tag-along rights give minority stockholders the ability to participate in the sale of stock initiated by a larger or majority stockholder. If a founder or institutional investor is selling stock to a third party, the tag-along clause allows other stockholders to sell a proportional share of their stock on the same terms and at the same price. For a deeper dive into how tag-along rights shape control in life sciences and other technology startups, read our guide. - Drag-Along Rights
On the other side, drag-along rights give majority stockholders the ability to force minority stockholders to sell their stock in a company-wide transaction. If the required voting threshold is met, every stockholder is "dragged" into the deal, ensuring that the buyer receives full ownership without delay or resistance. Our guide explains how drag-along rights help founders close exits, and how they can sometimes derail them if not structured properly.
Absolute or Conditional Prohibitions
Sometimes, the safest move for a company is to eliminate any chance that stock ends up in the wrong hands. This is where stockholders' agreements use the strictest form of transfer restrictions: absolute prohibitions and conditional prohibitions.
- Absolute Prohibitions
This clause flatly prohibits stockholders from transferring stock under any circumstances. It's not meant to be permanent, instead, it's often used temporarily. For example, immediately after incorporation, founders may agree that no stock can be transferred until a financing round is complete. This prevents early flipping and keeps the cap table intact until investors come in. - Conditional Prohibitions
Here, transfers are permitted, but only if strict conditions are satisfied. A stockholder agreement might require written consent from the board, compliance with securities laws, or the passing of a lock-up period before a transfer can go through. These conditions keep the company in control, ensuring no proposed transfer undermines its ownership structure or regulatory standing.
Buy-Sell and Redemption Rights
Some transfer restrictions are triggered when events occur outside a stockholder's control, moments that could otherwise leave the company with an unpredictable new owner.
These are called buy-sell and redemption rights and they apply in circumstances such as the death of a stockholder, a disability that prevents continued contribution, termination of employment, bankruptcy or divorce. In these cases, the company or other stockholders gain the right, and sometimes the obligation, to step in and purchase the affected shares.
Lock-Up Provisions
Lock-up provisions prevent stockholders from selling their stock for a fixed period of time. You will often see them written into a stockholder agreement that apply following major corporate events like financing rounds, planned IPOs or key licensing milestones. These clauses reassure new investors that insiders will not
exit too early. They help align stockholders for the long game while maintaining confidence in the company's valuation.
They also stop premature sales that could undermine market trust or derail pending transactions. Whether the goal is to protect valuation before an IPO or to signal stability during a milestone deal, lock-up provisions work alongside other transfer restrictions in stockholders agreements to keep ownership aligned and investor confidence intact.
How Crowley Law LLC Can Help
At Crowley Law, we work with founders to build stockholder agreements that protect long-term control, support clean exits, and align with investor expectations. From consent-based restrictions to ROFRs, drag/tag rights and buy-sell triggers, we tailor every provision to fit the realities of growing a life science or tech company.
FAQs
What happens if our current agreement doesn't include transfer restrictions
You may be exposed to unvetted investors, cap table instability or unintentional loss of control during a founder exit or equity sale. We help companies assess these risks and add protections without triggering renegotiation landmines.
Can transfer restrictions apply to both common and preferred shares?
Yes. In fact, most well-structured agreements apply different restrictions to each class, depending on the rights they carry. We often tailor these distinctions in life science companies to reflect board structure, voting control and liquidity timing.
Do transfer restrictions make it harder to raise capital later?
Not if they're drafted with foresight. Well-crafted restrictions can actually reassure investors by preserving a clean cap table. We structure agreements to support your next financing or strategic exit.
How do these clauses affect founders who want to step back or leave?
That depends on how your agreement treats triggering events. We help founders plan for transitions, including buy-sell rights and redemption mechanisms that ensure a smooth exit without disrupting control or valuation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
