Structuring Your Financing as the Purchase and Sale of Common Stock


Companies will often times structure the first financing with “friends and family” or with crowdfunding investors as the purchase and sale of common stock. This structure is generally used only with small transactions.



If you are the company selling the stock, this is a great way to structure the transaction because the investors will not have the economic and voting preferences concomitant with preferred stock. See related articles Structuring Your Financing as the Purchase and Sale of Preferred Stock and Less Risk, More Reward. By selling common stock, there is a greater likelihood that the founders and existing stockholders of the company will keep control of the company.

From the investor side, you would only want to structure your financing as the purchase and sale of common stock only if you invested very early in the company (and so you were getting a very large portion of the company) or you have a lot of trust and faith in the management team of the company. Generally, sophisticated angel investors and venture capital investors will not purchase common stock.

We expect a great many equity-based crowdfunding transactions to be structured as the purchase and sale of shares of common stock. These transactions are likely to be very early stage (pre-angel investor and VC), and no one investor will be putting in enough money to negotiate more favorable investor terms.

This article originally appeared on Venture Docs, an online platform for automating the creation of important legal documents for startup companies, investors, crowdfunding portals and attorneys.

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About the author: Bo Sartain

Bo is a practicing corporate attorney with the law firm of Haynes and Boone, LLP.  Bo’s legal practice focuses on the representation of investors and issuers in company formation, private equity and venture capital preferred stock and preferred LLC membership interest equity financings, and the representation of buyers and sellers in mergers and acquisitions. Formerly, Bo was a Systems Engineer and the founder and CEO of a startup software-as-a-service company.

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