William Rosellini

Basic Share Structuring

To start a Regulation D private securities sale you will need to start by developing an investment structure. The basic share structure should detail what the investors will get in return for their investment.

For example:

XYZ Company is offering 100,000 shares of common stock at $1.00 per share with a minimum investment of $5,000 (5,000 shares).

When setting up ownership in a company one should define the ownership by the percentage of stock each shareholder owns in the company. When filing the initial incorporation documents the founders are asked to list how many shares are “authorized” for use. This does not mean that they plan to “issue” all of those shares. It simply allocates shares that ‘can be’ used for whatever purpose necessary. A general rule of thumb we use, is:

Authorizing 30,000,000 shares, while issuing 5% of those shares (1,500,000 shares) to investors. Of course, this all needs to sync with whatever valuation method is being used.

Before setting up an offering to capitalize a company, one should sell a block of “founders shares” to themselves, and other founders. Founders shares are typically purchased at par value, which can be just about any price. A typical layout is .001 per share, e.g., 1,000,000 shares X .001 = $1,000. With that said, it would not be wise to sell stock shares to outside investors at “par value,” this would likely throw a wrench in valuations; nevertheless, the founders would need to determine an estimated value of the stock “after” the offering is closed, and use that number as a potential sales price. When shares are sold to investors the founders would then allocate a portion of the “authorized” stock shares to sell. Once they’re sold they become “issued and outstanding.”

Another consideration is designating different classes of stock shares. The typical classes are ‘preferred stock’ and ‘common stock.’ Moreover, their can be different classes of preferred stock and common stock, e.g., preferred class A, B, C, etc. Founders who are concerned about voting rights typically set up different classes to give them more control, for example, shareholders who own preferred class A may have 3 votes per share, whereas, common class A may have only 1 vote per share. Some founders also setup conversion scenarios, e.g., upon a successful IPO preferred class A may convert 1 for 10 into shares of common stock, so if one owned 10,000 shares of preferred class A they would received 100,000 shares of common stock.

To keep things simple in a first round, we typically issue only “common stock” to investors, but it can be done using just about any configuration, within reason.

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