• September 2018
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What are the general rights of common stock holders in a startup?

Regardless of which U.S. state you incorporate in, common stock shareholders possess a core set of rights that’s jurisdiction-neutral. These general rights exist in all states across the country:

The Right to Vote on Corporate Policy

Significant changes in corporate policy (e.g., mergers) must be voted on by common stock shareholders at the annual meeting. This can be in person or by proxy. The number of votes each stockholder gets is determined by the number of shares s/he owns. Usually, it’s one vote per share, although some companies have a class of common stock with elevated voting rights where it can be, for instance, 10 votes per share. The more common shares an individual owns, the greater their influence.

The Right to Vote for the Board of Directors

Common stock shareholders control management by voting for the company’s Board of Directors (BOD). The right to influence who holds senior management positions is a staple in the bundle of general rights common issue stockholders enjoy across the US.

One of the more important things you need to pay attention to is whether your voting rights are statutory or cumulative. Statutory voting is more restrictive in the sense that it limits your votes per vacancy. For example, if you own 1000 shares and there are three vacancies, you have 3000 votes, but you are limited to a 1000 votes per vacancy/candidate. However, if you have cumulative voting rights, you can allocate those 3000 votes in any manner you wish: all 3000 for one seat, equally across the three vacancies, or however you’re inclined to carve up your votes.

The Right to Share in Ownership and Profits

As business flourishes, common stock owners are entitled to a portion of the company’s assets. In other words, they have a right to receive the appreciated value of their shares as profits increase, expanding assets and enhancing stock price value.

Similarly, when the BOD decides to pay out part of its profits in dividends (as opposed to reinvesting in assets), common stock owners are entitled to be paid their share.

The Right to Inspect Corporate Books and Records

This is more relevant to private companies than to those that are publicly traded. As a common stock shareholder in a privately-held startup, you have the right to request access to corporate records. If you’ve requested, but were denied, the opportunity to review the corporate books, this should signal a red flag that you likely need legal assistance. I’m more than happy to answer here or in a private message whether your request conforms to the required “reasonableness” standard. If you’re dealing with a public company, this isn’t really an issue since they’re mandated to publicly disclose their financial information.

The Right To Sue

Stockholders who believe that the company has violated their rights have the power to sue the issuing company directly. They also have the right file a shareholder derivative action against directors or management on behalf of the corporation (thus, derivative), in the event of alleged wrongdoing by organizational insiders. This right empowers common stock shareholders to protect themselves against deficient or derelict management.

Pre-emptive Rights

This gives common shareholders the right to buy new issues prior to public offering. Although they are not nearly as ubiquitous as they once were, they’re still pretty prominent on the landscape of common stockholder rights. These are crucial to preventing the dilution of not only value, but also voting rights and company control – particularly in a privately held startup.

If your company is preparing to enter the next stage of funding, you’ll probably have many questions about your rights and protecting your stake in the organization. I invite you to check out LawTrades so you can connect & speak with an experienced startup attorney about your rights as a common stock shareholder.

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