Start Up Company Shares: Everything You Need to Know
Start up company shares allow new companies to attract and retain employees and provide a way for investors to value a start-up that lacks assets.3 min read
Start up company shares allow new companies to attract and retain employees and provide a way for investors to value a start-up that lacks assets. To value start-ups, investors will look at the future potential and assign a value on those assumptions.
Terms Related to Issuing Stocks
There are terms related to issuing stocks that are needed to understand stocks and how they work. These terms include:
- Cliff vesting is the specific date at which employees receive the full benefits from the company's retirement account.
- Equity is the value of the shares issued by the company.
- Restricted stocks are company shares that are not transferred to the employee until specific conditions have been met. This type of stock is seen as part of their pay.
- Shares are a portion or part of a larger amount that is divided with a group of people or with a group that contributes.
- Stock options allow employees to purchase company stocks at a discounted or fixed rate price.
- Strike price (exercise price) is the fixed price the owner is allowed to use to buy or sell shares.
- The vest is the time the employee must work at the company before the shares reach their full value. This time is called a vesting provision.
- 409A is the report that provides the value of your company's common stock.
Things to Consider Before Issuing Equity
Start-up founders know that equity is a powerful bargaining tool, but there are three things to consider before issuing stocks to avoid unintended consequences.
1. Stockholder voting rights, when given to a large number of people, may negatively impact the company founders ability to run the company as they see fit. With many start-ups, each stock share sold is given one vote. Stockholders are required by law in some states to vote on certain corporate actions. As a start-up, the company founders should hold at least 51 percent of the shares.
If the number of stockholders is large, there is also the burden of collecting signatures for situations where signatures are required. Acquisitions may require up to 90 percent approval, and if hundreds of people own shares, this will become burdensome to get all of the signatures. Also, when large blocks of shares are being issued to people who don't have the same vision for the company as the founders, a holdout or stalling may end the ability for the deal to go through. To avoid these issues, founders should be conservative with how many shares are sold.