On the surface, issuing private company stock seems fairly straightforward: determine how much ownership of the company you’re willing to give up in exchange for capital and then find a party that agrees to those terms. But then what? How do you make sure the process is fully documented and ownership is tracked in a way that makes it easy for shareholders to sell or transfer shares?
We’re talking about the process you use for issuing stock certificates, an important yet often overlooked aspect of issuing equity. Private companies can issue stock to shareholders through a few different ways, including via paper stock certificates, e-certificates or uncertificated shares. Considering how important stock ownership is to your company’s long-term growth, let’s take a quick minute to walk through the process of how to issue stock certificates in a private company.
Paper, Digital or Uncertificated Stock Certificates?
A stock certificate is designed to provide a record of ownership, one that is recognized by both the issuing company and the shareholder.
There was a time when owning equity meant holding a physical stock certificate; but nowadays that’s like physically carrying your password on a piece of paper in your wallet. In fact, the public stock markets mostly abandoned certificates decades ago in favor of the Direct Registration System (DRS), which is essentially a public ledger maintained by the issuing company or the company’s transfer agent.
Still, some private companies elect to issue physical stock certificates to shareholders. Usually drafted by a law firm, these physical certificates require the verified signature of the holder anytime stock is to be transferred or sold. Beyond the ceremonial value, paper stock certificates don’t really offer any distinct benefits. If anything, they can be more difficult to manage if you end up having to chase down signatures from the certificate holder during a subsequent liquidity event.
Instead, more private companies are moving towards uncertificated shares. These shares are managed through entries in a ledger the same way money is recorded in your bank account or the way public company shares are recorded in a brokerage account. With uncertificated shares you can simply email the shareholder a written notice that contains all the relevant info pertaining to the issuance and the company, as well as a clearly conspicuous way for the shareholder to request more information if desired. Then all you need is a way to keep track of all the shares that have been issued. Because there are no physical certificates, the company’s ledger is the official representation of all shares outstanding, so in order to execute a legal transaction, shareholders are forced to engage the company in a formal process that can be executed and recorded properly.
How to Issue or Switch to Uncertificated Shares
Uncertificated shares are currently accepted in every state in the United States (and most other countries) and issuing them generally involves three steps:
- Make a board resolution that the company is authorized to issue uncertificated shares.
- Next, you might need to amend the company’s by-laws to the same effect.
- Lastly, start issuing shares by recording them on the company’s official stock ledger.
Once you issue uncertificated shares, you’ll need a system to track them. That’s where Shareworks comes in. Our cap table software makes it easy for you to issue and manage your electronic stock holdings in seconds.