Initial shares: Overview, definition, and example
What are initial shares?
Initial shares refer to the first set of shares issued by a company when it is established or during its initial public offering (IPO). These shares represent the ownership interest in the company and are distributed to the company's initial shareholders, which can include the founders, early investors, or the public. The issuance of initial shares is a critical step in the process of establishing ownership and raising capital for the company.
In the case of a privately-held company, initial shares are often allocated to the founders or early investors. For publicly traded companies, initial shares are sold to the public through an IPO, where shares are offered for the first time to external investors. The number of initial shares issued will depend on the company’s capital structure and the amount of capital it needs to raise.
Why are initial shares important?
Initial shares are important because they define the ownership structure of the company. They establish who has a claim to the company’s assets, profits, and decision-making rights (such as voting on company matters). Issuing initial shares also enables the company to raise funds needed for growth, expansion, or operations.
For investors, purchasing initial shares provides an opportunity to become part-owners of the company, potentially benefiting from its future growth and profits. For the company, issuing initial shares allows it to raise capital without taking on debt, which can be a more flexible way of financing.
Understanding initial shares through an example
Let’s say a startup company is being founded by three entrepreneurs. To raise capital and establish ownership, they decide to issue 1,000 initial shares in the company. The shares are distributed as follows: each founder receives 300 shares, and the remaining 100 shares are allocated to an early investor. This allocation sets the ownership structure, where each founder owns a third of the company, and the investor owns 10%.
In another example, a technology company decides to go public through an IPO and issues 1 million initial shares to the public. The company raises funds from investors who purchase the shares, and in return, they receive ownership interests in the company. As the company grows and its stock price increases, the value of those initial shares could rise, benefiting the shareholders.
Example of an initial shares clause
Here’s how an initial shares clause might appear in a company’s charter or shareholder agreement:
“Upon the incorporation of the Company, the Company shall issue 10,000,000 initial shares of common stock, of which 6,000,000 shares shall be allocated to the founding members, 2,000,000 shares shall be set aside for early investors, and 2,000,000 shares shall be available for issuance under the Company’s employee stock option plan.”
Conclusion
Initial shares are a crucial element of a company’s formation and capital raising efforts. They represent the first ownership stakes in the company and help define the distribution of ownership among founders, investors, and other stakeholders. Whether a company is privately held or publicly traded, issuing initial shares is a key step in financing the business and providing investors with an opportunity to share in its potential success.
Understanding how initial shares work is important for both the company and its investors, as it determines the ownership structure, funding sources, and potential for financial gain. For companies, issuing initial shares can provide the necessary capital to grow, while for investors, it offers an opportunity to be part of a company’s journey from the beginning.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.