One excellent way to grow your corporation and finance your startup is to issue stock, which helps you raise capital without borrowing. But it can be tricky to know exactly what to do, so let’s take a walk through the necessary steps.
Things to consider when issuing stocks
There are a few important details to iron out when you’ve decided on issuing stock – here are the most important things to consider.
How much capital to raise?
The limits here are more flexible; you don’t have to worry about a bank or lender dictating what you can afford to borrow. When you sell stock, you can set a dollar amount on the money you want to make. It’s helpful to have a goal in mind, but you’ll need a good picture of how you’ll grow your shareholder’s investment before you can convince investors to buy stock.
Decide how many shares to issue
The total number of shares your corporation can issue for sale (‘issuance’) is usually dictated by your articles of incorporation, but you can amend this to have more flexibility. However, you should be aware that most states will require you to pay a fee to amend your article. The number of shares you usually issue equals the shareholders you’ll have, though some will buy several shares.
Be aware that your board members voting rights could be impacted by the number of shareholders, so you need to make a logical decision. If each share equals a vote and you issue 50,000 shares, then each individual will have a negligible impact, but issuing fewer shares will create a more powerful (though smaller) voting base, increasing the value of individual shares. You can add more shares later. The initial amount of shares for public corporations is called your IPO ‘Initial Public Offering’.
The value of each share
The most straightforward way to decide the value of your shares is to divide the amount of capital you need to raise by the number of your shares, but be aware that the value of each share impacts the number of votes an individual can have. If the purchase price is low and one person buys up multiple shares, they could gain significant control. You can avoid this by selling fewer shares at a higher value. You might consider getting a professional valuation if you’re unsure what your company’s stock is objectively worth.
Private or public corporation
There are two types of corporations, private and public. Both issue stock though they do so differently. Private corporations issue a limited amount of shares compared to public corporations. Public corporations trade on the public market and sell practically limitless shares. There are advantages to both, public corporations raise nearly unlimited funds with investors, but the potential comes at a price; public corporations register with the SEC – the SEC requires public corporations to have greater accountability, such as offering shareholders extra disclosures. In contrast, private companies can’t issue stock in the same way, but there is less red tape. The primary disadvantage is the smaller potential for raising funds.
Types of stock
The next stock decision is the stock type that you’ll be offering. If you operate an S-corporation, you’ll be able to sell one class of stock. With a C-corporation, you can issue several classes. The two most commonly offered are preferred stock and common growth stock.
Common growth stock gives voting rights to investors, and they have the largest potential for long-term growth. Preferred shares don’t confer the same rights, but they do grant a stronger claim to the assets. If the corporation owes a debt to its shareholders or is late paying dividends, preferred shareholders receive payment first.
You could also issue other stocks, but these are the usual options. Well-established businesses usually offer common income stock, and they’re ideal for investors seeking high dividends. You can also consider convertible preferred stock, which is similar to preferred stock, aside from the stockholder’s ability to trade shares for common stock by a particular date.
Shareholders agreement
Once stock has been issued, you grant certain rights and privileges to your investors in return for their monetary investments. The shareholder’s agreement is a contract between shareholders and corporations which defines the privileges and rights of the shareholders. The agreement helps outline critical issues such as the division of control and ownership, granting rights such as voting, and getting a cut of the profits via dividends. Still, they don’t have unlimited access to the corporation’s assets. The shareholder’s agreement sets out rights to dividends, control over the board of directors, the creation of new stock (or transfer of existing stock), and more. The agreement may also govern how and when new shareholders can purchase shares.
The agreement protects existing shareholders’ stake in the corporation, preventing the corporation from issuing so much stock that voting rights become diluted or lose meaning. It also prevents shareholders from gaining majority control of the company.
Registering with the SEC (public corporations)
Private corporations don’t have to register with the SEC, but all public corporations do. The securities and exchange commission regulates the trading of stocks, bonds, and some other investments. Stock registration is a fully online process involving filling out a form and providing information about your company and the stock you want to register. Upon registration, your stock receives a stamp of approval as a profitable business to invest in. You may also be asked to provide CPA-certified financial statements and information about your business management. You should expect to pay $121.20 per $1,000,000 in shares as a registration fee.
You’ll also need to provide a disclosure to your investors, per SEC regulations. A disclosure accompanies every stock sold, helping to prevent fraud and deceit. You need to consider your certificates – an official certificate of ownership must accompany every stock you sell. Traditionally, corporations offer paper stock certificates, but you can also provide an e-version. The only crucial thing is that each shareholder receives official proof of their stock ownership in a legal document. You can consult the SEC for more detailed requirements.
The last word
Issuing shares is an excellent alternative to a bank loan for entrepreneurs needing to raise capital, as shares of stock allow you to raise significant funds in a short timeframe. But corporations are the only entity type capable of issuing stock. Doing it correctly can be complex, but you can consult a professional business attorney or SEC guidelines for further information.
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