What are Non-voting Shares?
This post explains what non-voting shares are and why a corporation might want to authorize them. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.
In this post, I will focus on non-voting common shares. Preferred shares raise issues that go well beyond voting rights. (See What Is Preferred Stock?)
(more…)How Do We Issue Corporate Shares?
Several weeks ago, I wrote about how to issue LLC membership interests. In this post, I am addressing how a small corporation should issue corporate shares.
To start, one must examine the Certificate of Incorporation (Delaware) or Articles of Incorporation (California) to determine the maximum number of shares that may be issued. (To simplify this discussion, I will assume that only one class of common shares has been authorized.) A corporation may not issue more shares than are authorized. (more…)
Must a Corporation Issue All Authorized Shares?
Sample Stock Transfer Ledger
This post is based on a conversation I had with a foreign client recently. Q. Must a corporation issue all authorized shares?
A. No, a corporate may, but it does not need to, issue all authorized shares.
Foreign Parent Audit
This question arose because my foreign client was being audited. The auditors thought that they had uncovered a problem.
Stock Transfer Ledger Available for Download
Today I added a stock transfer ledger template to the documents available for free user downloads. Corporations can use this template to help track the issuance of shares and transfer (or repurchase) of shares after they have been issued.
At the Downloads page, click on Stock Transfer Ledger. You browser then will make the stock transfer ledger file (an Excel spreadsheet) available for download.
I was prompted to make this file available by a question on Quora (What’s the best way to establish an electronic version of a corporate share register?).
Related post: How Do We Issue Corporate Shares?
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Future Services Can’t Buy Shares in CA but *Can* Buy LLC Membership
Future services seem like a great no-cost way to buy equity in a startup. In California, however, whether you legally can buy equity with future services depends on whether the startup is a corporation or a limited liability company (LLC).
Corporations Code Section 409(a)(1) specifies the types of “consideration” that can be paid for corporate shares. These include, for example, “money paid; labor done; [and] services actually rendered to the corporation or for its benefit or in its formation or reorganization”.
However, “neither promissory notes of the purchaser [subject to certain exceptions] nor future services shall constitute payment or part payment for shares of the corporation“. So a California corporation cannot grant shares in exchange for future services.
What is a Stock Assignment Separate from Certificate?
I recently introduced a client to the document called a Stock Assignment Separate from Certificate. While well-known to business lawyers, this document is not known to most business owners.
The client was implementing employee and management stock plans. To provide stock for the plans, the corporation was going to repurchase shares from the founders.
The CFO asked whether and how the founders should complete and sign the assignment provision on the back of their share certificates.
How can I Invest More Money in My Corporation?
This post is based on a Quora question in which a user who already had invested money in his corporation wanted to know how he can invest an additional amount. My answer, reproduced below almost verbatim, starts by summarizing the steps for an initial equity investment.
Let’s assume you did your startup paperwork properly: The board of directors approved issuing some or all of the corporation’s authorized shares to you in exchange of payment of certain consideration; you deposited that consideration into the corporation’s bank account; the secretary recorded your share ownership on the corporation’s share transfer ledger and issued a share certificate to you.
Accelerated Vesting may Mean Little if Your Employer is Acquired
This post is adapted from a question that I answered on Quora. Q. How can an acquirer make an employee with single-trigger vesting commit to a “lock-up” period to receive all his shares? Say you’re an engineer at a just-acquired startup with 0.5% of the old company, and your shares fully vested upon acquisition. The acquirer’s terms were that current employees get 50% of their payout up front, and 50% if they stay on board for 5 years. How is that possible, legally?
A. It is difficult to provide a definitive answer without looking at the relevant documents. However, I suspect that this situation is possible because 50/50 pertains to shares in the acquiring company rather than the acquired company.
In my experience, acquired companies will put some effort into converting employee equity interests directly into comparable interests in the acquiring company, but there is no guarantee this will happen.
So you may (I can’t be sure, not having reviewed the documents) have a choice: Keep your 0.5% fully-vested interest in the acquired company (which is likely to have little, if any, market value in the foreseeable future), or accept the 50/50 conversion to an equity interest in the acquiring company.
Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
How Can I Switch from a Sole Proprietorship to a Corporation?
This post is based on (and is an edited version of) a Quora question and my answer. Q. How do you switch from a sole proprietorship to a corporation? You do, of course, want to keep all your intellectual property and brand and street cred and so on. Can you treat that as equity?
A. Yes, you can treat the assets of your sole proprietorship as the consideration for which your shares are issued. You need to create an agreement by which you (as an individual) assign those assets (including the intellectual property rights therein) to the corporation. This is, of course, a friendly transaction, so the assignment agreement can be simple – no need for endless pages of legal boilerplate to protect against litigation that never will occur.
Related post: How to Assign a Patent Application to Your Startup Company
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
How Many Shares Should My Corporation Authorize and Issue?
This post discusses the number of shares that a corporation should authorize, and the number of authorized shares that a corporation should issue.
On a couple of occasions, I have worked with founders whose corporations (prior to retaining me) issued a small number of their authorized shares.
In one instance, four founders formed a corporation that was authorized to issue 50,000 shares, but had issued (to themselves) fewer than 400. They asked me to help reallocate shares among them because, as time had passed, they saw that their respective contributions to the business differed from what they initially had expected.
