The Use of Common Stock in Venture Capital Transactions
The simplest form of equity capital is common stock. Common stock has many distinguishing factors as follows:
- Common stock is not convertible into another type of security
- Each share enjoys one vote
- Dividends are payable without limit but only when declared by the board of directors
- In liquidation, common stock holders are the last priority to which to distribute assets
In venture capital transactions, there may be two types of common stock that are issued. The first is Class A common stock, which is like preferred stock without the special voting rights, which some statutes require in shares labeled "preferred." A second type of common stock is junior common stock. While this type of stock is not used very frequently, it allows companies to get cheap stock into the hands of key employees at minimal tax cost.
Determining what type of capital to raise and how to structure the financing transaction is of critical importance to growing ventures. As such, it is crucial to understand the key terms and consult the appropriate legal and business plan advisers when embarking on the capital-raising process.
- Related article: Venture capital business plan template
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