There are various times were you might be faced with the possibility of losing control of your company.
I am going to share with you just how to protect yourself.
The Certificate of Incorporation is one of the ten “Must Haves” legal documents for your business
. Protecting your company starts from the very beginning, at the onset, when you’re ready to form your new entity.
Now, I know many companies have not
heard of this technique, so it’s more than likely your Certificate of Incorporation will not provide for what I am about to share with you. But, you can still amend your Certificate of Incorporation at any time to be able to implement this technique.
How you lose control of your company
You lose control of your company in many ways, but the primary way is by losing the majority votes. Typically, if you have less than 50% of the voting rights, you have technically lost control of your company. So, you want to avoid giving up 50% of your company if you want to continue to maintain control.
Certainly there may be times were giving up 50% or more of your company makes sense, such as – when you are going to sell your business. There are not many reasons why you would give up control of your company, especially after all the hard work you put in to get it to where it is.
Many companies look to raise money via investors for expansion purposes, going public, and financing operations and more. There is a risk of losing control of your business in a financing. It doesn’t have to be that way. There are creative ways and methods to making everyone happy and yet maintaining control of your business!
A corporation can authorize and issue common shares, preferred shares and different classes or series of common and/or preferred shares. Most companies will authorize common shares and preferred shares. Authorized shares are the total amount of shares that are available to the company that can be issued. Issued shares are the shares that are in the hands of the owners/shareholders.
Having the ability to issue two classes of stock offers you and your company the best flexibility in being able to raise financing and not lose control of your company.
Preferred shares are slightly different from common shares in that they have preferential rights over the common shares. Typically the preferred shares are issued in a Series – Series A, Series B, etc.
You will want your Certificate of Incorporation to provide for both (1) authorized common shares and (2) authorized preferred shares. Typically companies authorize 5,000,000 or so common shares, par value $0.0001 per share and authorize about 1,000,000 preferred shares, par value $0.0001 per share (same as common).
Once the Certificate of Incorporation (or amendment) has been filed, you will want to authorize a Series A preferred stock. This is done through a Board of Directors meeting/consent (make sure your Certificate of Incorporation provides for the Board to authorize a series of preferred stock).
Terms of the Series A Preferred
Here is how you protect yourself from losing control of your company.
You provide that the Series A preferred stock has 80% of the voting rights and that the preferred shares vote along with and together with the common shares. In other words, one (1) share of Series A preferred stock grants you 80% of all the voting rights.
So, at that point, it doesn’t matter how many common shares are sold, issued, or granted because you will have 80% of all the votes with your one (1) share of Series A preferred stock that you own. So you won’t lose control. Plus, you have more flexibility and freedom in issuing the commons shares because you’re not worried about losing control.
You Stay in Control
Some people might say that granting the owner/founder 80% of all the votes isn’t fair to the other shareholders. Well, most shareholders do not want to run the company, and they would prefer you have control over it. Most shareholders really just want to make money with their investment in your company. Besides, who better to run the company than you! You are the one who built it! You know best! You stay in control!
Takeovers are More Difficult
Another benefit to having 80% of the votes is that it makes a takeover attempt more difficult.
Going Public and Maintain Control
You can go public and not lose control. As a director and officer of your company you will have a fiduciary responsibility to your shareholders and to keep them happy. Certainly knowing you have control of your company allows you to sleep at night and also devote your time and energy to making happy shareholders.
You can Raise Capital and Not Lose Control
As for venture capitalists and private equity firms – the 80% voting rights has been around and there are alot of companies that have received financing with the 80% voting rights. All in all, VCs and equity firms want a return on their investment to show to their investors.
If the 80% is a potential roadblock in your negotiations and discussions, then it may be time to discuss meeting milestones in your business and the ramifications if these milestones are not met, such as, a change in control and a buy-out scenario.
In the End
You can protect yourself from losing control of your company.
Take the necessary steps to do so!
BizandTravelBlog.com is published by Virginia K. Sourlis, an attorney licensed in the state of New Jersey. This site does not provide legal advice and it does not create an attorney-client relationship with anyone. This should not be considered legal advice. You should seek an attorney for your own situation. This website is for informational purposes only. Any and all views and opinions expressed on this site are solely those of the author and do not reflect the views of Virginia’s law firm. BizandTravelBlog.com is not associated with any organization, group or institution, unless otherwise specifically noted.
I have not received any compensation for writing this post. I have no material connection to the brands, products, or services that I have mentioned. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”