Many start-ups and new corporations are interested in creating stock. In fact, many prospective employees will base their salary on stock options when deciding to work for a start-up. Therefore, it is very important to create the right kind of stock plan. While there are many classes of stock, this article will focus only a simple creation of common stock.
The first thing to do when creating stock in the new start-up is to determine the amount of shares that will be authorized. Once determined this amount must be stated in the articles of incorporation. While there is no minimum or maximum amount of stock , the corporation will be taxed on the amount of authorized shares, so the number cannot be too high. Most start-ups choose to create 10 million shares of common stock. This number is easily dividable amongst many founders, and allows employees and prospective investors to purchase large quantities.
Next, the value of the stock must be determined. As mentioned above, this value and the amount of authorized shares will determine the corporate tax. The minimum that a stock can be sold is called the “par value.” Accordingly, all the 10 million shares will have a par value, and the par value must be the same for each of the authorized shares created. Most start-ups choose to have their par value at fractions of a dollar. Some are as low as $0.00001 par value. If this is your par value, then 10 million shares would cost $100.00 to purchase. As time goes by and the start-up is more successful, shares created in the future will have a greater par value.
The next step is to determine how to divide up the stock between the founders, employees, and future investors. This step will be covered in a future article.