Stock
represents an ownership interest in a corporation,
which is typically represented by the issuance
of a certificate for shares of stock in exchange
for capital from the investors. Money or property
given to a corporation in exchange for an equity
interest belongs to the corporation and typically
does not have to be repaid on a certain date.
The
two most common types of securities, common
stock and preferred stock, are discussed below.
Common
Stock
Common
stock are the shares in a corporation with no
preferences or priorities over other classes
of stock. The rights in these shares, include
voting rights; rights to distributions; liquidation
rights; and other rights, are the same for all
shareholders holding common stock on a share-by-share
basis.
Preferred
Stock
Preferred
stock are the shares in a corporation that are
entitled to a preference above shares of common
stock.
The shareholders of preferred stock typically
have the following rights:
- Special
voting or veto rights;
- A
priority on distribution of dividends;
- A
priority on the corporation's assets upon
liquidation or merger;
- A
right to convert to common stock based on
a formula;
- A
right to force the corporation to buy back
shares at some time in the future (called
"redemption rights");
- Protection
against certain stock splits, stock dividends,
and future cheap issuances of stock (called
"anti-dilution" rights); and
- A
possible separate right to elect a designated
number of directors.
Right
of First Refusal
A
Right of First Refusal Agreement is an agreement
that requires shareholders wishing to sell shares
to give the corporation the first priority right
on purchasing their shares. You should consider
entering into a Right of First Refusal Agreement
with the shareholders of a your corporation
for two important reasons: (1) to main control
over your corporation; and (2) to keep your
corporation's shares in friendly hands.
This agreement may also be drafted to include
the option or obligation of your corporation
to buy back shares from a shareholder who has
died, become permanently disabled, or is no
longer involved with the corporation either
as a director or employee.
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