How to Grant Common Stock - Explained
What is the Process for Granting Common Stock to Founders, Employees, or Investors?
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Table of ContentsHow to Grant Common StockWhat is the Board Approval? What is the Authorization of Shares? What is the Stock Purchase/Grant Agreement?What is Securities Compliance?What is the 409A Valuation?What is the Capitalization Table?
How to Grant Common Stock
A company must undertake several steps in order to grant stock. The primary steps are as follows:
What is the Board Approval?
The board of directors must approve any issuance or grant of stock. The bylaws will generally lay out the number or percentage of shareholders who must approve such a grant. In some case, the bylaws may allow existing shareholders the right to vote on the issuance of stock, but this is only in very closely-held companies.
What is the Authorization of Shares?
A company must authorize stock before it can issue shares. The company authorizes stock through the articles of incorporation. When the company was originally incorporate, it was required to state the number of authorized shares and the par value of those shares. If the company wishes to issue shares that are not currently authorized, it must amend the articles of incorporation to authorize the type and number of additional shares to be issued.
What is the Stock Purchase/Grant Agreement?
As previously discussed, the company will either issue stock to raise money or to compensate employees. Stock issued to raise money is done through a stock purchase agreement. The investor agrees to provide value to the company in exchange for the stock. If shares are issued to employees, this is done through a stock grant. The stock grant agreement is generally an additional agreement accompanying an employment agreement.
What is Securities Compliance?
If stock is being offered for sale to outside investors (not current employees or owners of the company), federal and state securities laws apply. The company is obligated to either register the shares, the issuance, or perfect an exemption from registration. The board must approve any registration or exemption.
What is the 409A Valuation?
A company granting stock to an employee is providing compensation to the employee. As such, the company must know the fair market value of the stock at the time of grant. This is known as a “409A valuation” as a reference to the relative tax provision. The 409A valuation must take place annual and if there is any major financing event.
What is the Capitalization Table?
The capitalization table (or “cap table”) is the table containing the percentage of company ownership held by shareholders. It will account for all of the classes of equity and shareholders. It will indicate the number and percentage of shares held. The capitalization table is generally part of the company’s bylaws as an attached schedule.
If you have additional questions about the process for issuing stock, use LawTrades free question-and-answer service.
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