Basic Training: Issuing Shares to Investors

Posted on June 20, 2015 in Form a Company

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Investors can be a real boon to your business, but no question–they’ll want a piece of the action.  What’s involved in issuing shares to them?

Q: We currently have a market cap of $200,000 (2,000 shares X $100 per share). We were wondering how to authorize new shares to new investors.

A: It’s not unusual for companies to issue new shares at some stage in their existence. This can happen when:

  • You want to provide bonuses to employees or directors
  • You’re issuing additional equity as part of a takeover of another company
  • As in your case, you want to provide equity to new investors.

However, before you run to the secretary of state and fill out the forms to issue more shares (and to change your certificate of incorporation to reflect the increased number of authorized shares), you need to look carefully at a couple of matters. First, is there a shareholders’ agreement among the current owners?  You need to be sure that you properly document the shareholders’ approval of this transaction and follow the procedures in the agreement for admitting new shareholders.  If this transaction will dilute the profit percentages (and it likely will), the current shareholders may need to be specifically apprised of this effect that the transaction will have. Make sure your legal counsel helps you through this process.

In addition, you’ll want to speak with your accountant to determine both the value of the shares and whether they will fall within the same class of shares as those already issued. If not, that, too, will need to be documented and squared away with the secretary of state of the state you’re incorporated in.

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