Business Capitalization - Explained
How is a Business Initially Funded?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is Business Capitalization?What are the steps in business capitalization?Subscription LetterSubscription AgreementsStock Certificates83(b) ElectionsSecurities FilingsStock Issuance & Option PlansBuy-Sell AgreementsConsents to Service
What is Business Capitalization?
Capitalization is the funding of the business venture. A startup will be capitalized by contributions from founders. In exchange for contributed value (funds or assets) the founders will receive shares of the corporation
Next Article: Employee & Intellectual Property Matters. Back to: LAW, RISK, and TRANSACTIONS
What are the steps in business capitalization?
The corporation should follow the following steps regarding capitalization:
A subscription letter acknowledges a prospective shareholder's intention to purchase equity in the newly-formed company.
A subscription agreement (or stock-purchase agreement) is the agreement entered into by founders of the corporation to purchase shares of the corporation in exchange for a given amount of value. The subscription agreement will lay out the specific types of shares purchased and the rights of the holder of those shares. It may also place additional restrictions on the shares and establish a period of time over which ownership of the shares vest in the purchaser.
- Note: A subscription agreement may have appendices containing additional information, including the companys capitalization table and the stock ledger documentation corporate ownership.
- Sample Common Stock Purchase Agreements: https://www.orrick.com/Events-and-Publications/Documents/1951.pdf
- Sample of Restricted Stock Purchase Agreement: https://www.orrick.com/Events-and-Publications/Documents/1975.pdf
- Sample Capitalization Table: https://www.orrick.com/Events-and-Publications/Documents/1953.xls
- Sample Stock Ledger: https://www.orrick.com/Events-and-Publications/Documents/1954.doc
The board generally issue Stock Certificates and Receipts for the purchasers of shares. The stock certificates represent a share of stock of the corporation. Some corporations do not issue stock certificates; instead, these corporations send out notices of Issuance of Uncertified Common Stock.
- Sample: A sample of stock certificates may be found at https://www.orrick.com/Events-and-Publications/Documents/1952.pdf
- Sample: A sample notice of issuance of uncertified common stock can be found at https://www.orrick.com/Events-and-Publications/Documents/Notice-of-Issuance-of-Uncertificated-Common-Stock.pdf
The board may prepare of Memorandum regarding the 83(b) Elections by the founding shareholders. The 83(b) election must be made at the time of issuance. This election locks in the tax basis of the stock at the time of issues. This is important for equity that vests over a period of time and may significantly increase in value by the time it vests. It will avoid an unfortunate tax situation.
- Sample: A sample 83(b) Election Memorandum can be found at https://www.orrick.com/Events-and-Publications/Documents/1955.pdf
Prepare and File Federal and State securities filings for stock issuances to shareholders (Founders)
Note: See our Securities law lecture series for more information on the federal and state requirements for securities filings.
Stock Issuance & Option Plans
Prepare Stock Option/Stock Issuance Plan & Agreement & Stock Option Agreement or Early Exercise Stock Option Agreement
Sample Stock Plan: https://www.orrick.com/Events-and-Publications/Documents/1965.pdf
- Sample Option Agreement: https://www.orrick.com/Events-and-Publications/Documents/1965.pdf
The corporation will want to ensure that the companies shares are not transferred to third parties except under the circumstances approved by the corporation. The buy-sell agreement may provide any number of rights to the corporation, such as the right of first refusal to purchase shares.
- Note: A well-drafted buy-sell agreement is incredibly important. It can, however, by complex. It is a good idea to seek professional assistance from an attorney skilled in drafting buy-sell agreements.
Consents to Service
Prepare and file Form U-2 Uniform Consent to Service of Process (in connection with securities filings).