Stock Issuance: Everything You Need to Know
You can issue equity in your startup as soon as it has been incorporated. Generally, stock issuance will happen as part of the incorporation process, or directly afterwards as part of your standard post-incorporation to-do list. Throughout the lifetime of your corporation, you will be able to issue company shares again, and chances are this will be one of your key fundraising mechanisms.
It is important to issue shares by the book. Future investors will do their due diligence of all prior stock issuances. Additionally, all stock issuances are subject to securities law and the regulations of the Securities and Exchange Commission. And finally, legally ineffective stock issuances leave you vulnerable to litigation risk and unnecessary legal costs. For all these reasons, it is important to be aware of all the important legal issues around stock issuance.
Approval by the Board
Your company can only issue shares by approval of the board. Depending on your company’s constitution and bylaws, you will either need written board consent or you can get (more informal) approval at a board meeting. For due diligence purposes, it is a good idea to rely on written consent for important decisions such as stock issuances.
Of course, shares can only be issued in accordance with the corporation’s constitution. If there is some provision in the corporation’s constitution that prohibits a particular stock issuance, board approval will not be sufficient. In such cases, you can issue the shares by way of a shareholder vote -– in effect, the shareholder vote that is needed to amend your constitution. This might be a shareholder majority, but more likely a supermajority, depending on your corporation’s constitution.
In terms of securities law, all securities issued by a company must be “duly paid for”. This means that your corporation must receive something of measurable value in exchange for the stock that it issues. Payment does not have to be monetary. It can also take the form of property or services.
Keep in mind, however, that the different manners of payment for the company shares will have vastly differing tax implications for the person receiving the stock. For this reason, it is a good idea to consult a tax attorney before making any decisions in this regard.
For a standard stock issuance, the documents required are the board approval as well as a duly executed stock purchase agreement. In other cases, the documents required may vary. For instance, in the case of an option grant, you will need: board approval, an independent third party valuation, a copy of the stock option plan, the option grant and a grant notice.
Ensure that you know exactly which documents are required for the particular security issued. Have these properly signed, digitized, and stored. Have them easily accessible as well (a document numbering and reference system is advised). When you get to due diligence, you will be very glad that you took time time to keep these documents safely stored and properly executed.
Every security issuance, regardless of type or size, must comply with federal and state securities laws. In general, those laws require that you take the necessary steps to fully inform investors, and that you file records of your compliance. The filing process can be quite burdensome, and for that reason many companies opt to make use of one of the exemptions provided for. Be sure that you do qualify for an exemption, however. If not, you have to file all relevant documents and register the securities involved.
Finally, issue stock certificates to the new shareholders. These can be actual paper certificates, although it is increasingly more common to use electronic certificates and stock ledgers. As soon as the shareholder is registered in the company’s share register, the shares in question are deemed to have been issued.
Get in Touch with a Startup Attorney
At LawTrades, we get startups. You need accessible, affordable legal advice at your fingertips. And you need to be able to focus on growing your new business, not on the legal issues that keep popping up as you go along. That’s where we come in. Whether you are finalizing your company post-incorporation, looking towards equity financing or compensation, or anything else, our experts are here for you. Get in touch today.