Understanding Share Classes for Startups: Choosing the Right Structure for Your Articles of Incorporation

Introduction: When incorporating a startup, one critical decision is determining the share classes to include in the company’s articles of incorporation. Share classes define the rights, privileges, and restrictions associated with different types of shares issued by the company. At Falcon Law PC, our experienced startup lawyers can assist you in understanding the various share class options and help you choose the most suitable structure for your articles of incorporation. Contact Falcon Law PC at info@falconlawyers.ca or 1-877-892-7778 for personalized legal guidance.

Exploring Share Class Options for Startups:

  1. Common Shares: Common shares are the most basic type of shares and typically carry voting rights and the right to receive dividends, if declared. Common shareholders have a residual claim on the company’s assets and earnings after the satisfaction of all other obligations. Startups often issue common shares to founders, employees, and early-stage investors.
  2. Preferred Shares: Preferred shares confer certain preferences and rights to shareholders, often at the expense of common shareholders. Preferred shareholders may enjoy priority in receiving dividends, liquidation proceeds, or other distributions. They may also have additional voting rights or the ability to convert their shares into common shares at a predetermined ratio. Preferred shares are commonly issued to angel investors, venture capitalists, or strategic partners.
  3. Voting and Non-Voting Shares: To allocate voting rights selectively, startups can issue voting and non-voting shares. Voting shares grant shareholders the right to participate in corporate decision-making through voting at shareholders’ meetings. Non-voting shares, on the other hand, may provide economic rights but restrict the shareholder’s ability to vote. This structure allows founders and key stakeholders to retain control while offering economic benefits to other investors.
  4. Founder/Management Shares: To reward founders and key members of the management team, startups may create a separate class of shares known as founder or management shares. These shares often carry special rights, such as enhanced voting power, pre-emptive rights, or special dividend preferences, to acknowledge their contribution to the company’s success.
  5. Employee Stock Options: Many startups use employee stock option plans to attract and retain talent. These options allow employees to purchase shares in the future at a predetermined price. Although not technically a share class, employee stock options provide employees with the opportunity to share in the company’s growth and align their interests with those of the shareholders.
  6. Convertible Preferred Shares: Convertible preferred shares combine the characteristics of both preferred and common shares. Investors holding convertible preferred shares have the option to convert their preferred shares into common shares at a predetermined conversion ratio. This allows investors to participate in the company’s success while initially enjoying the protective rights associated with preferred shares.

Consulting Falcon Law PC for Share Class Structuring:

Determining the appropriate share classes for your startup requires careful consideration of your specific goals, funding requirements, and corporate structure. Falcon Law PC can provide valuable assistance with:

  • Evaluating your business objectives and advising on the optimal share class structure
  • Drafting and amending articles of incorporation to include the desired share classes
  • Ensuring compliance with applicable corporate laws and regulations
  • Providing guidance on shareholder agreements, voting rights, and dividend provisions
  • Assisting with the implementation of employee stock option plans and other equity compensation programs
  • Offering ongoing legal support as your startup grows and evolves

Conclusion: Choosing the right share class structure for your startup is a crucial step in the incorporation process. Falcon Law PC’s experienced startup lawyers can guide you through the complexities of share class selection and ensure that your articles of incorporation reflect your business objectives. Contact us at info@falconlawyers.ca or 1-877-892-7778 for personalized legal assistance.

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