Written May 1, 2020
Bylaws are the rules you establish to run your company.
Some startups will include a Right of First Refusal provision in their bylaws. A Right of First Refusal provides a startup with the right to purchase and redeem any of its stock prior to such stock being sold to another prospective stockholder. This is helpful for a startup to maintain its shareholder base, although there are usually exemptions for things like estate planning.
The Right of First Refusal provision can either be located in each individual Stock Purchase Agreement or it can be in a startup’s bylaws. It's potentially more convenient having the provision in the bylaws because then you may not have to worry about making sure a Right of First Refusal is in each stock agreement; however, sometimes a Right of First Refusal provision in the Bylaws can cause issues. I’ve seen this a few times when the shares subject to the Right of First Refusal include all securities, as opposed to just common stock. Such a blanket provision includes preferred stock and thus, the investors’ securities. Investors typically do not want their shares so restricted. Therefore, if you include the Right of First Refusal in your Bylaws, preempt any investor issues by restricting the provision in your bylaws to apply only to common stock. This will prevent you from having to amend and restate your bylaws before funding as well as protect the company as intended with the Right of First Refusal.
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