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Entrepreneurship

Can we give non-voting shares to an existing partner to increase their equity?

When we formed our corporation we issued voting shares to myself and the other 2 partners. I am at 51% ownership and the other 2 are at 29 and 20%. One partner is going to put in another cash investment but obviously wants more equity for that investment. I am unwilling to give up any of my 51% control as it was my invention, I do 70% of the work and have all the vision. Our share structure is unlimited for both classes so can we simply issue him x amount of non-voting shares to increase his equity? That would bring his equity up to 33% from 20%, the other partners down to 24% and mine down to 43%. However, what I understand based on my numbers, his 'voting' percentage would only be 17% and that combine with the other partner's 24% would only be 41% vs my 43% still leaving me in ultimate control. Am I understanding this right?

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David C

I help you buy, sell, plan, value a business

You can do whatever you wish with shares as long as the parties agree.

If you have voting and non-voting classes of shares you can issue these for the cash investment.

The question is... why would he? Normally non-voting shares have certain other characteristics like fixed rates of return or preference in the case of company dissolution.

Other things you may consider would be issuing a debenture for the new money. This is a debt instrument so there would be no shares sold.

You could issue a convertible debenture whereby the debt becomes equity at a certain share price in certain events, such as the sale of the company.

It's up to your imagination as long as the other party agrees.

Here are two videos I made that touch on this topic, one about how to use shares in deal making and another about using shares to raise capital.

https://youtu.be/1EjKjSAd1F8

https://youtu.be/5h_ouZ-sUoU

Just arrange a call if you'd like to discuss your specific situation.

dave

Answered about 7 years ago

Adeel Javaid

Cybersecurity Consultant

The new ratio of 33%, 24% and 43% will be the profit sharing ratio, the voting rights of founder will not be diluted anyways. The issuance of non-voting stock only entitles the grantee to take an additional share in profit of company but the voting rights of founder will be the same as were before the issuance of such stock.

Answered about 7 years ago

Jason Knott

International Tax Attorney and U.S. CPA

Yes. You can issue additional additional shares to the existing shareholder, so long as the corporation's articles of incorporation and corporate bylaws permit the additional shares to be issued. The total of new shares issued, together with existing shares outstanding, should not exceed the authorized capital allowed per the articles of incorporation. If the number of shares will exceed the stated amount, you will need to amend your articles of incorporation. The corporate bylaws govern procedures necessary to issue additional shares. Generally, the board of directors must approve the issuance and sale of all shares of the corporation, regardless of share class.

Answered about 5 years ago