What kind of stock should investors receive?
Investors are issued Preferred Stock, which has additional rights and privileges that Common Stock does not have (such as liquidation and dividend preferences). Startups typically issue Common Stock to founders, advisors, board members, employees, contractors, accelerators, and strategic partners. Preferred stock is typically set up at a 'Seed Round' (when investment amounts are over $1 million).
Prior to that, fundraising is typically known as a 'Pre-seed' and startups typically raise money through SAFEs and Convertible Notes. In most cases, because they are pre-revenue, it's not an easy task to determine a share price for your equity without sales or growth metrics. By using these instruments, you can take in money for operations with a promise of equity later on.
Our companies are incorporated with a par value of .00001 (ten millionths) cent per share. If you sell your common shares to an investor, the sale sets a price on the value of the shares and that will affect related actions from that point forward. This could potentially:
- Raise your Delaware franchise taxes
- Establish an unaffordable or tax consequential stock price for sweat equity team members
- Cause complications to additional fundraising if the new share price was set prematurely
If you would like to dive more into SAFEs and Convertible Notes, here are some starter FAQs and a great Blog post explaining the Gust Launch SAFE and Convertible Notes. Our platform also offers popular non-Gust Launch investment instruments.
If you still would like to sell your founder stock to investors, the stock grant agreements on Gust Launch are intended for team members providing services to the company (founders, contractors, advisors, employees, etc) not passive investors. You'll want to work with your legal counsel to draft the appropriate documentation and have your board approve the change in share price.
Last updated on August 30, 2021