The High-touch Legal Services® Blog…for Startups!

© 2009-2019 Dana H. Shultz, Attorney at Law

Should We Authorize Preferred Shares when We Incorporate?

Certificate for preferred shares

This post discusses whether founders should authorize preferred shares, in addition to common shares, when they incorporate.

As I discussed in What is Preferred Stock?, corporations typically issue preferred shares to institutional investors, such as venture capitalists (VCs). The term “preferred” refers to preferences that those shares have relative to common shares.

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What is a Certificate of Determination?

Logo for Avvo, where Dana Shultz answered a question about: a Certificate of DeterminationOne of my Avvo answers led me to write this post. Please see CA corp Certificate of Determination: must it include tag-along and drag-along provisions?

Corporations, by default, issue common shares to shareholders. However, corporations also can issue preferred shares. Preferred shares have characteristics (“preferences“) that typically make those shares more desirable than common shares. Please see What is Preferred Stock?

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What is Preferred Stock?

Picture of a large tomato and a small tomato, symbolizing preferred stock and common stock

Preferred stock typically is issued to venture capitalists or other institutional investors. Its name is derived from the fact that it has significant “preferences” relative to common stock, which is the basic equity security that is issued when a corporation is formed.

Common stockholders’ principal right is to vote on the election of directors and on other fundamental corporate matters. In addition, common stock has the potential to increase in value if the corporation performs well financially.

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