Authorized Shares vs. Issued Shares:

• Authorized Shares: This is the total number of shares a corporation can potentially issue. It’s like a pre-determined pool of shares you can draw from.
• Issued Shares: These are the shares actually distributed to founders, investors, and employees. Owning these shares translates to ownership percentages in the company.

Why 10 Million Shares for Delaware Corporations?

Delaware is a popular state for incorporating businesses. Here’s why authorizing 10 million shares is a common practice:

• Flexibility: It provides enough shares for founders, investors, and creating an employee stock option pool (granting shares to employees or service providers).
• Future Growth: This allows for future needs like issuing shares to additional investors as your company grows.

Understanding Ownership Percentage:

The number of issued shares determines ownership percentages, not the number of authorized shares. For example:

• You authorize 10 million shares.
• You issue 6 million shares to founders (let’s say 60% ownership goal).
• The remaining 4 million shares stay in the authorized pool, not currently affecting ownership.

Key Takeaway:

The 10 million authorized share recommendation provides a buffer for future needs. The number of issued shares, not authorized shares, determines ownership percentages in your company.

Need Help Structuring Your Startup?

Determining the right share structure is crucial for your young company. Consulting with a business law attorney can ensure you make informed decisions about share authorization and issuance.

Let Us Help You Form Your Corporation

The post How Many Shares Should Your Delaware Startup Issue? appeared first on Carbon Law Group.

What is Par Value?

Par value refers to the initial value assigned to a share of stock in a corporation. It’s essentially a starting point for a share’s price. While some states require a par value, others, like Delaware, allow for shares with no par value.

Why Keep Par Value Low for Startups?

For new companies, we recommend starting with a very low par value, typically $0.0001 per share. Here’s why:

• Lower Cost of Initial Investment: A low par value makes it less expensive for founders to purchase their initial shares. Remember, buying shares requires some form of payment (consideration). A low par value keeps this initial investment minimal.
• Tax Advantages: Early on, you likely don’t want to deal with tax implications related to share value. Granting shares with a high par value could trigger tax burdens for founders.
• Flexibility for Future Growth: A low par value doesn’t restrict your future share price. As your company grows, the market value of your shares can increase without causing tax issues for early shareholders who received shares at a low par value.

Example:

Imagine granting someone 10,000 shares with a par value of $1 each. This person would essentially be receiving $10,000 worth of value, potentially triggering tax obligations. By keeping the par value low (e.g., $0.0001 per share), you avoid this scenario.

Important Considerations

While keeping par value low offers several advantages for startups, there are a few things to keep in mind:

• Certain State Requirements: Some states might have minimum par value requirements. Always check your state’s regulations.
• Shareholder Rights: Par value can sometimes factor into shareholder rights related to distributions or liquidation. Consulting with a lawyer is recommended to ensure you understand these implications.

Seeking Legal Guidance

Par value, along with other aspects of forming a corporation, can be complex. If you’re unsure about setting a par value for your startup, consulting with a business law attorney is crucial. Attorneys at Carbon Law Group can help you understand the legalities of par value and guide you through the incorporation process.

Remember:

Understanding par value and its implications is essential when structuring your startup’s ownership. By carefully considering these factors, you can ensure a smooth and tax-efficient foundation for your growing business.

The post Understanding Share Price in Your Startup appeared first on Carbon Law Group.

The short answer is – NO.

After forming a corporation, there are several considerations that startup founders should take into account to mitigate their risk and to adopt a corporate structure that is in line with their expectations.

The below summary describes the initial documents necessary to ensure your corporation is legally compliant and to create effective asset protection mechanisms. Note: many of these principles can be applied to LLCs as well, but for the purposes of discussion here, we are focusing on corporations.

Director Resolutions

Director Resolutions are how you make important decisions for your corporation during the meetings of the Board of Directors. The basic initial resolutions include:

• electing Directors and appointing Officers, such as the CEO, CFO, and Secretary;
• approving Bylaws and Shareholders Agreement (discussed next);
• obtaining authorization to open a separate bank account for your startup; and
• issuing shares to shareholders of your corporation, etc.

Following such corporate formalities is essential to prevent your business creditors from reaching your personal assets. In the event of an audit or lawsuit, it provides evidence that you keep your personal and business assets separate, treat your corporation as a distinct entity, and cannot be personally liable for corporate actions.

Bylaws

Bylaws provide a governance structure and procedures for your startup. Adopting Bylaws is mandatory in California and many other states. The Bylaws address the following questions:

• how to manage the corporation, and elect the Directors and the Executives;
• how to make important decisions, such as approving major transactions; or
• how to accept new investments or investors into your business, etc.

Adopting and following your Bylaws regularly is crucial in shielding shareholders’, directors’ and executives’ personal assets from corporate liabilities. This is why you should have well-structured Bylaws for your corporation that is is easy to understand and follow.

Shareholders Agreement

A Shareholders Agreement is helpful when your business has more than one founder or new investors join your startup. This Agreement memorializes the understandings and intentions of shareholders and can introduce significant protections for you and your partner(s), such as:

• the right to buy existing shares before non-owners (Right of First Refusal);
• the right to sell your shares back to the corporation (Put Option/Buy Back);
• the right to buy newly issued shares before non-owners (Pre-emption Rights); and
• the right to buy other owners’ shares in case they breach their duties (Buy-Sell Rights).

Having those provisions in place will allow you to tackle finance and governance disputes efficiently without impairing your regular business operations.

At Carbon Law Group we can help you to negotiate, draft, and incorporate these documents into your new business structure. This will shield your personal assets from your business creditors’ claims and will set clear paths for dispute resolution between you and your partners.

If you have any questions about how to draft governance documents for your startup or need assisting with setting up your corporation, do not hesitate to reach out to us. You can use this link to schedule an appointment to speak with an attorney today.

This blog article is published for educational purposes only. Its sole purpose is to give you general understanding of the law and not to provide specific legal advice. By using this website you understand that no attorney client relationship has been established between you and the publisher. Please contact an attorney licensed in your state for competent legal advice.

The post Forming Your Corporation is One Thing, Maintaining It Is Another appeared first on Carbon Law Group.