Should voting rights equal equity shares when incorporating a startup?

Generally, the answer is yes. If cost and uniformity are the main drivers, then obviously incorporating with only one class of voting common shares is the easy solution. Initially each founder wants to “get what they paid for” so to speak. However, this assumes that no flexibility is desired and that equity and votes go hand in hand i.e., a 20% shareholder is intended to have both 20% of the total votes and 20% of the equity or value and 20% of any dividends.

This “equality” may be expected in the early days of your start-up but more flexibility if often desired later on as relative individual performance, the need to raise capital, provide employees with ownership incentives and tax planning objectives changes over time.

To avoid the cost and legal issues of reorganizing the company in future to migrate from a single class of stock to several classes of stock each with different rights and preferences, the articles should provide for this flexibility from the outset. Often professionals recommend additional share classes be included in your original articles of incorporation for future flexibility (even though they may not be necessary at the date of incorporation).

An example of this might be adding share classes to be used for future investors on a Series A Seed round or equivalent. Until you negotiate the deal with an investor you won’t know what type of investment instrument you will need (e.g., debenture, common shares, preferred shares, etc.) nor the specific attributes of such instrument, so trying to predict this at the time of incorporation is often not practical (or cost-effective).

Designing share capital is a critical component to the proper set-up of your start-up company so it’s worth getting professional advice early on and should be carefully considered with a business lawyer so your articles of incorporation are properly drafted and filed. LawTrades is a marketplace for businesses to hire and work with on-demand, vetted attorneys. Some of our attorneys have worked for companies such as Yahoo, Stripe, and Playboy in the past and are now practicing on their own, at lower prices. Feel free to check us out!

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