Should we include a transfer restriction in our bylaws?

Takeaway: For a closely held, bootstrapped company, a strict transfer restriction requiring board consent can be a powerful control tool. For a startup planning to raise venture capital, this approach will almost certainly need to be replaced with a more flexible, market-standard restriction.

In a startup’s earliest days, the stockholders are often just you and your co-founders. To preserve stability and control, founders sometimes add a stock transfer restriction to their corporate documents. This provision prevents stockholders from selling or transferring their shares without company approval, allowing the business to control who appears on the cap table.

The right type of transfer restriction depends entirely on your long-term financing goals.

The Strict Restriction: Requiring Board Consent

For companies intending to remain closely held—owned by a small group of founders—a strong consent-based restriction can be effective.

How it works: Written into the Bylaws, this provision prohibits any stockholder from transferring shares to a third party without prior written approval from the Board of Directors.

Why it’s powerful: The board has a broad veto right over any transfer, for any reason. This gives maximum control over ownership and prevents shares from landing with competitors, unhappy former employees, or other unwanted parties.

Why This Model Doesn’t Work for Venture-Backed Startups

While a strict consent-based restriction offers maximum control, it clashes with venture capital norms. Institutional investors generally will not agree to be subject to a board’s unfettered discretion over their ability to sell shares.

Investor pushback: VC funds have obligations to their limited partners to seek liquidity. They cannot risk a founder-controlled board blocking future secondary sales.

Market practice: In Series Seed and Series A financings, VCs typically require that their shares be exempt from strict consent restrictions. Founders’ shares may remain subject to such restrictions initially, but as companies progress through later rounds, founders often lose board control—and therefore the ability to waive restrictions on their own stock.

In place of strict consent requirements, most venture-backed companies adopt rights of first refusal (ROFRs). ROFRs restrict transfers but allow the company or other stockholders to match the sale terms, balancing control with investor flexibility.

Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.