certificate of incorporation

Earlier this month, news broke that Facebook is changing its certificate of incorporation to reflect important changes that directly affect both its long-term future and the current majority voting control held by Facebook cofounder and CEO, Mark Zuckerberg. As explained by Matt Weinberger on Business Insider, Facebook is in the process of altering its certificate of incorporation so that (1) “Zuckerberg’s majority voting control is good only while he is an executive at the company” and (2) he cannot “pass his majority control to his descendants—including his daughter, Maxima Zuckerberg—in the event of his death.” Under this proposed new plan, if Zuckerberg, who still is employed by the company he cofounded and currently controls more than 60% of its voting power, decides to leave the company for any reason or has his employment terminated, he loses his majority voting control while still remaining majority shareholder. Similarly, under this plan, in the event of Zuckerberg’s death, his estate will be unable to pass his majority control on to his wife or daughter or any other potential children or grandchildren.

What’s the takeaway for other business owners?

Often times, Your Contract Lawyer receives requests from clients who are bringing on a new employee or service provider (i.e. independent contractor) and want to draft an agreement granting them equity in the client’s company as an additional form of compensation. The question that inevitably comes up is, “What happens if this person stops working for the company?” Although much simpler than the Facebook context, this is in a basic sense the same question that Facebook is trying to address in changing its certificate of incorporation.

As a business owner, you never want to be “stuck” in your business with a former employee or service provider who is no longer actively performing work for the business. Your priority in giving any such person equity in your company should be that, in the event they are no longer performing work for the company for whatever reason, you have the ability to pull back the equity you granted them either by a buyout at market value or at a lower level, punitively, if they leave before a certain amount of time.

A restricted stock/interest agreement formalizes these considerations

If, after careful consideration, a business decides to move forward in granting equity as a form of additional compensation to an employee or service provider, Your Contract Lawyer will create a Restricted Stock/Interest Agreement along with an Employment or Contractor Agreement, setting forth rules addressing the above considerations, which allows the business owner to tie the equity in the company to the person’s continued work on behalf of the company, thus affording a clean break with the company in the event they cease performing services.