Ownership of Delaware corporations is represented by shares of stock. Stockholders are the people who own shares, and thus part of the corporation.1 Even though they are the owners of the corporation, stockholders don't control the corporation directly (although stockholder approval is required for certain decisions). Instead, they control who is on the board of directors, which in turn controls the corporation through the corporation's officers.
Startups usually issue either common or preferred stock. Preferred stock has additional rights and privileges that common stock does not have, with respect to liquidation and dividend preferences, at a minimum. Startups typically issue common stock to founders, employees, and consultants, and issue preferred stock only to investors.
A corporation's stock can be organized into classes, which must be defined in the certificate of incorporation. Most startups start off with one class of common stock, conveniently called Common Stock. When they raise venture capital, startups typically amend their certificate of incorporation to create a class of preferred stock, conveniently called Preferred Stock.2
The certificate of incorporation can also specify that a class of stock be further divided into different series. It is rare for common stock to be divided into series, but preferred stock is almost always divided into one or more series for each financing. A financing is usually referred to by the series of stock that was created for that financing. For example, if a startup raises money by issuing shares from a new series called Series A Preferred Stock, people would refer to that round of financing as the startup's Series A financing.
Requirements to Issue
A corporation cannot issue stock unless:
- the board has approved the issuance and
- there are enough shares available for issuance.
If the stock is of a particular class, then there must be enough shares of that class available for issuance. Similarly, if the stock is of a particular series, there must be enough shares of that series available for issuance.
The first step in determining how many shares are available for issuance is to determine the number of authorized shares. The number of authorized shares is the number of shares the corporation is authorized to issue. It is impossible to issue shares that have not been authorized. The number of authorized shares is set in the certificate of incorporation. If the stock of the corporation is divided into classes or series, the certificate of incorporation must set the number of authorized shares for each class or series, as well as a total number of authorized shares. Most startups authorize 10 million shares of common stock at formation.
Then, to determine how many shares are available for issuance, take the number of authorized shares and subtract shares that have been issued as well as shares that have been reserved for some other purpose (for example, for issuance under a stock plan). On the off-chance the corporation has repurchased any shares, and those shares have not been retired, those shares would be added back in as shares available for issuance.
If a corporation wants to issue shares, but there are not enough shares available for issuance, it must file an amendment to its certificate of incorporation with the Delaware Secretary of State to increase the number of authorized shares.