Silicon Valley Legal Bible（1） How are the shares of founders of U.S. companies calculated?

The Silicon Valley Legal Bible with Forty-Two Chapters, a legal encyclopedia tailored for founders I am American lawyer Liu Xiaoxiao.

Many people who have been working on their startups for half a day still don't understand how shares are calculated in the U.S. When they see Authorized Shares written on the certificate of incorporation as 20,000,000 shares, they tell me that this is the total number of shares in the company. But this is not the case at all.

I. Two kinds of shares on one share certificate

In the United States, companies do not have a business license, but a document called Certificate of Incorporation, which is called in different states, such as Delaware called Certificate of Incorporation, and in California called Articles of Incorporation, so for the majority of entrepreneurs, you must submit the Delaware Secretary of State's For the majority of entrepreneurs, you will definitely see this sentence on the Certificate of Incorporation document that you filed with the Delaware Secretary of State

The total number of shares of stock which the Corporation is authorized to issue is 20,000,000.

But then when we got the certificate of incorporation, we assumed that the company was 100% owned by one founder. As a result, the founder found out that I only have 10,000,000 shares written on the stock certificate, am I only a 50% shareholder?

The Authorized Shares in the middle is still 20,000,000 shares, but the actual shares received by the founder are 10,000,000 shares in the upper right corner.

One is the superficial level, the Authorized Shares have nothing to do with the actual number of shares held by the founders, or the only relationship is that the number of shares held by all shareholders should not exceed the Authorized Shares, and the actual number of shares held by each founder depends on the Issued and Outstanding Shares. The denominator of the entire company's share ratio calculation is not the largest Authorized Shares, but the sum of the shares held by all shareholders.

So going back to the example, if there is only one founder with 10,000,000 shares, then even if the Authorized Shares are 20,000,000, it does not affect the founder's share percentage of 100%, so from another point of view, if the founder only issues one share, as long as there are no other shareholders, then this one share is 100%, regardless of the Authorized Shares. If the founder issues only one share, as long as the company has no other shareholders, then this one share is 100%, regardless of whether the Authorized Shares are 20,000,000 or however large the number is, it does not play any role in the calculation.

Here, I am afraid you are confused, but there is a very deep legal theory concept involved, that is, Legal Capital System (legal capital system) and Authorized Capital System (authorized capital system).

II. Legal Capital System and Authorized Capital System

• 1. Legal Capital System (Legal Capital System)

The legal capital system is based on the "three principles of capital" - capital determination, capital maintenance, and capital conservation. What does it mean? When a company is established, the total amount of capital must be clearly stated in the articles of incorporation and issued and fully subscribed or raised at one time, otherwise the company cannot be established, that is, when the company is established, all shareholders must be present and subscribe to all the shares of the company at one time, and there can be no outstanding parts. After the establishment of the company, the capital increase due to operational or financial needs must be resolved by the shareholders' meeting and the new share issuance procedure of changing the articles of incorporation.

China is very typical of the Legal Capital System (statutory capital system), although the abolition of the minimum capital standards and paid-up requirements for general companies, and the clarification that shareholders can pay up their capital several times and for a long period of time after pledging as agreed in the articles of incorporation, but it only means the mitigation of the statutory capital system.

In addition to China, the EU is also very typical of the Legal Capital System (legal capital system), and even more strictly enforced than China's Legal Capital System (legal capital system), which requires a minimum registered capital of 25,000 euros in the EU company law (note that China has abandoned the concept of minimum registered capital in 2013). However, the EU also has flexibility on the basis of the legal capital system, for example, Germany, France, Austria and other EU countries allow the board of directors to be authorized to issue new shares to increase capital after the establishment of the company by way of articles of association or special resolution of the shareholders' meeting to amend the articles of association, the maximum period of authorization shall not exceed 5 years, and the authorized capital shall not exceed half of the share capital at the time of authorization. The authorised capital may not exceed half of the share capital at the time of authorisation and the issue of new shares requires the consent of the Supervisory Board.

• 2. Authorized Capital System (ACS)

Authorized Capital System (Authorized Capital System) refers to the company establishment, although the total amount of Authorized Shares (authorized shares) should be determined in the articles of incorporation, but the promoters only need to subscribe part of the shares, the company can be formally established, and the rest of the shares are authorized to be issued by the board of directors at any time according to the company's production and operation and securities market conditions. Corporate capital system.

The United States is a typical Authorized Capital System (Authorized Capital System), in which the company has a larger number of shares to begin with and authorizes the board of directors to decide how many shares can be issued. Examples include Korea, Hong Kong, Singapore, and the Cayman Islands and the Virgin Islands, which we often hear about.

There are also countries that have adapted the Authorized Capital System, such as Japan and Taiwan, which have an Authorized Capital System, where the board of directors can decide how many shares to issue, usually within the scope of Authorized Shares. The board of directors can decide how many shares to issue within the authorized shares, but the board of directors is limited to decide how many shares to issue within three times the number of shares issued.

• 3. Stated Capital System

There is a final type of share system that is more liberal than the authorized capital system called the Stated Capital System, which means that the board of directors has the right to decide on the issuance of capital in accordance with the company's actual needs in the course of its operations, without being limited by the total number of authorized shares. By eliminating the limit on the total amount of capital to be issued by the Board of Directors, the Board of Directors can decide on the number of shares to be issued, giving the Board of Directors the greatest autonomy in making decisions. The Stated Capital System is followed in the UK, Australia and Canada.

So with that said, you entrepreneurs should not be surprised, especially those who have experience in starting companies in China, not to understand the US corporate system entirely with Chinese corporate thinking.

The Silicon Valley Legal Bible with Forty-Two Chapters, the legal dryness of entrepreneurship. I am U.S. attorney Xiaoxiao Liu, and I will see you in the next issue.