Common Shares – Never too Simple

To summarize the last few blog posts: I advocated that Canadians should incorporate in Canada and, if located in B.C., incorporate in B.C. instead of federally.  The next decision to make concerns the company’s share structure.

I recommend incorporating your startup with a single class of common shares – simple.  Often I am asked about more complex share structures, such as a preferred class, a non-voting class or a section 85 class.  While there are situations where I recommend creating these classes, do not request their creation without understanding why you need them.

Preferred shares, while desired by investors, typically are not created until the investment is secured as you do not know the structure of the preferred shares the investors will want and each investor is different.  There are types of preferred shares that can be molded for future investors (blank cheque preferred) but I tend to stray away from these shares as they are divisive among investors and lawyers.

Non-voting shares can be used for friends/family investors and awarding employees without diluting your voting power.  Erring on the side of simplicity, I recommend using common shares for these purposes but tying the common shares to a voting rights/trust agreement (or proxy agreement) that restricts how those shares are voted.  This maintains corporate structure simplicity while achieving the same goals.  Again, if you don’t have an exact reason for creating these shares, then I recommend against it.

Section 85 shares are used for a tax-deferred transfer of valuable assets to the company.  For example, if you owned an expensive mainframe and wanted to transfer it to the company (without loaning money to the company in order to buy your own mainframe).  Most startups do not have valuable assets to transfer to the company so this structure is not needed.  Instead, simply have the company buy the assets for a reasonable sum.

Finally, I always recommend creating a share structure familiar to investors.  To that end, a common share only structure is frequently seen in U.S. and Canadian startups and will be familiar to those investors.

SUMMARY:  Like any other item you buy, only buy a company structure when you understand why you need it.

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