Stock Issuance by a Corporation

Stock represents an ownership interest in a corporation, which is 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 does not have to

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, distribution rights, liquidation rights, and other rights. All rights are the same for each shareholder 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 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 "antidilution" rights);
• A possible separate right to elect a designated number of directors.

Be sure to read What's the Difference Between Common and Preferred Stock? for more information on this topic.

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 your corporation for two important reasons: (1) to maintain 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 as either a director or employee.