Taking Stock of the Situation: Issuing Stock and Entering Contracts
Stock is a representation of ownership of a corporation. A person who owns stock, a stockholder, by extension owns part of the corporation itself. However, stockholders generally do not have direct control over the corporation, as they are only able to appoint board members who in turn operate the corporation through the officers.
It is standard practice for startups to offer one of two varieties of stock — common stock and preferred stock. Preferred stock carries with it certain privileges that common stock does not have. Specifically, preferred stock offers more options in terms of liquidation and dividend preferences, and potentially more.
A corporation’s stock is divided into classes. Often the initial offering is in a class of “common stock,” and subsequently “preferred stock” is offered in certain situations.
Generally, startups offer common stock to founders and employees, while preferred stock is often reserved for investors.
A corporation can also divide its stock offerings into series. This is fairly common for preferred stock, as it is issued during distinct phases of the fundraising process. The first class of preferred stock is referred to as Series A Preferred Stock.
Requirements to Issue
In order to issue stock, a corporation’s board must first approve the issuance, and the corporation must have stock to issue. So, if the stock is of a particular class or series, the corporation must have enough shares of those varieties to issue.
To identify the number of shares available for issuance, a corporation must first determine the number of authorized shares, which is outlined in the certificate of incorporation. This same practice is true of classes and series of stock. These quantities must also be defined in the certificate of incorporation.
Most startups authorize 10 million shares of common stock when they are first formed.
In the event that a corporation wants to issue more shares than were called for in the certificate of incorporation, that document must be amended prior to the issuance.
Contracts are formal agreements between two or more parties that are enforceable by law. A formal contract does not, contrary to popular belief, have to be written. Oral agreements are binding legally as well; however, as they provide significantly less legal protection than written contracts, corporate lawyers discourage oral agreements.
Formal contracts do not need to be formally drafted by an attorney. In fact, agreements that are made between qualifying representatives from two or more parties are contractually binding. A common example of this is an email chain between a CEO and a vendor, supplier or other interested party.
So who qualifies to enter into a contract on behalf of the corporation? Good question. Boards of startups generally afford this authority to the CEO.