Should Unissued Shares Be Used for Future Capital Raising?

When considering whether to retain unissued shares for future capital raising, business leaders must weigh the potential benefits against the specific circumstances of their company. This article explores the advantages and disadvantages of reserving unissued shares, particularly in the context of ongoing funding rounds and the establishment of new capital structures.

Advantages of Retaining Unissued Shares During Ongoing Funding Rounds

During a funding round, it is often beneficial to have a sufficient number of unissued shares available for the following reasons:

Meeting Subscription Requirements: Companies can authorize a sufficient number of shares to ensure that the round can be fully funded, either by direct sale or through the conversion of preferred stock into common shares. Ensuring Flexibility: Keeping an adequate number of unissued shares provides flexibility for handling option grants, advisor services, and strategic partnerships. This headroom helps manage rounding errors and accommodate future extensions of the round. Theoretical Conversion Rights: By convention, companies typically reserve additional unissued shares to handle the theoretical conversion rights associated with preferred stock. This is especially important to prevent issues that might arise from stock splits or antidilution adjustments.

Disadvantages of Retaining Unissued Shares in Unraised Rounds

On the other hand, it is generally not advisable to authorize a large number of unissued shares when dealing with rounds that have not yet been raised for the following reasons:

Approval Processes: Any amendment to charter articles or certificates requiring new share authorizations typically needs approval from multiple stakeholders, including company officers, board members, shareholders, and key investors. Adding more unissued shares at an early stage would complicate this process. Unnecessary and Complex: Until an exact share structure and terms are agreed upon, including unissued shares in the charter is unnecessary and impractical. Any adjustments would need to be made again upon closing the round, requiring further approval. Fees and Administrative Burdens: In jurisdictions where the annual fee is based on the number of authorized shares, limiting these to the issued shares may help reduce fees. Adding extra unissued shares would require additional filings and fees, increasing administrative complexity.

Practical Considerations and Jurisdictional Differences

The number of unissued shares available can vary significantly based on the jurisdiction. In many places, companies are created with an unlimited number of unissued shares, which simplifies future issuances. However, in other areas, limiting the number of authorized shares can help reduce annual fees. Regardless of the jurisdiction, increasing the authorized share cap is a straightforward filing and fee payment process.

Conclusion

The decision to retain unissued shares for future capital raising hinges on the specific needs and circumstances of the company. While it can be advantageous to have unissued shares available during ongoing funding rounds, it is generally not advisable to do so in the absence of a firmer capital structure agreement. Business leaders should carefully consider the potential benefits and drawbacks before making a decision.