A stock purchase agreement is a contract that allows businesses to record the sale and purchase of company stock between a buyer and a seller.
What is a Stock Purchase Agreement?
A stock purchase agreement (SPA), also known as a share purchase agreement, is a contract signed by both the company (or shareholders of a company) and the buyers of the stock. This agreement protects both the company and the buyers. The agreement itself lays out the sale of shares in a company and what is being obtained.
Shares of stock in a company are often sold to raise money or for some other agreed-upon compensation. Small companies and startups may also offer stock in the company as an employee benefit or founders of the company may hold shares of stock. The agreement itself lays out the price per share and the amount of shares being purchased.
Restricted stock purchase agreements
Restricted stock purchase agreements offer a way for the company to better protect its ownership. When stock options are offered to attract talented employees, this type of agreement gives an extra incentive for employee loyalty. With this agreement, there is a vesting schedule attached to the transfer of the ownership of stock. A standard vesting schedule might be four years, which means that you don’t own the stock prior to the fulfillment of the vesting schedule.
For instance: a company has a vesting schedule of four years. One employee decides to resign after two years of employment. The company has the right to repurchase the stock back from the employee. This encourages employees to stay for a set tenure of time and it also gives them a vested interest in the success of the company. The more successful the company, the higher its shares soar.
This can be an excellent tool for companies that offer stock options, guaranteeing that shares can be repurchased by the company if an employee doesn’t stay with the company.
If you need legal documentation that proves and records ownership of a certain number of shares of stock in a corporation, download a comprehensive Stock Certificate form.
What is the Difference Between an Asset Purchase Agreement and a Stock Purchase Agreement?
The difference between an asset purchase and a stock purchase agreement is that an asset purchase agreement focuses on the assets of the business (property, equipment, contracts, etc), and a stock purchase agreement focuses on the shares of the business, whether a controlling stake or the entire business.
Stock Purchase Agreement Example
Below you can find what a typical stock purchase agreement looks like:
Stock Purchase Agreement
Reasons to Use a Stock Purchase Agreement
You need a stock purchase agreement if you plan on selling shares of your company.
If you’re the only employee of your company, this might be a step you skip. Although, if your plans are to grow the company, creating shares and an agreement can help you when the time comes to expand.
There are a few reasons to create a share purchase agreement:
- To obtain funds for a company to expand and thrive.
- As an incentive for highly skilled talent. This makes your company more attractive to talent that may be able to command higher pay at another company.
The benefits of having a stock purchase agreement
The reality is that if you’re selling shares of your company, there is no scenario where it’s a good idea NOT to create a share purchase agreement.
What Happens Without a Stock Purchase Agreement
Not having a well-drafted stock purchase agreement will put your company at financial risk.
Without a written contract, the terms of the sale and ownership would not be governed by any legally binding agreement. This might put you at risk of having shares of your company bought up by outsiders. It might also open you up to litigation because there’s not set resolution clause.
There isn’t a scenario where selling shares of stock without this agreement would be prudent.
What to Include in a Stock Purchase Agreement?
Stocks are highly regulated by the federal and local governments. It’s important that the share purchase agreement adheres to all of the regulations and laws applicable to the sale of shares. If any portion of the agreement violates state or federal laws, it can invalidate the agreement. It’s also important that all sections are factual. If the representation of the company or stock worth is deemed false or fraudulent, that would invalidate the agreement, as well.
Information that should be included:
- The company name and location. The legal, registered name of the company and its address must be included.
- The purchaser’s name and information. The purchaser’s name and information must be included.
- Value of stock per share.
- The number of shares being sold.
- Date and time of the transaction.
- The location of the sale.
- Warranties made by the purchaser and seller. This section guarantees that the company is in good standing and owns the shares of the company in question.
- Representations made by the purchaser and seller. This guarantees that all pertinent information has been disclosed.
- Purchase and Sale. This portion of the contract stipulates that the certificates will be endorsed and lays out responsibility for the transfer tax.
- General Provisions. This section lays out and guarantees that the sale is conducted in accordance with the laws governing the area.
- Total Price of Purchase and Financial Stipulations. This section will discuss the total price of the purchase and may layout a percentage to be paid at the signing with the balance paid at a later date. It may also stipulate how the payment will be made.
- Witnesses. This section allows for witnesses to sign the agreement and for notarization, making it legally binding.
- Termination. The termination clause will layout circumstances in which the seller or purchaser might terminate the agreement.
- Articles. There can be a section of articles pertinent to this specific transaction. This section can include stipulations about employees/employee benefits, taxes, and other aspects essential to the finances of the business and transaction.
If your company is selling shares to raise funds, entice employees, or grow the business, a share purchase agreement is essential. If you’re in the beginning stages of writing your business plan for a new venture or you have a fledgling company in need of investors, a stock purchase agreement is mandatory to move forward with the sale of shares.
Stock Purchase Agreement Template (PDF & Word Download)
Stock Purchase Agreement