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Capital Stock

The Capital Stock clause defines the number, type, and rights of equity interests in the corporation. Typically, the clause will provide for the authorization of common stock and preferred stock.

Common stock represents a partial ownership interest. This class of stock carries voting rights, which unless restricted, entitles the holder to one vote per share. Common stock holders may receive dividends and liquidation payments, but only after the corporation have satisfied it obligations to the preferred stock holders.

Preferred stock also represents a partial ownership interest. It generally does not entitle the holders to voting rights. However, the stock typically pays a fixed dividend and grants the holders prior rights in the event of bankruptcy to receive payment.

The clause typically grants the Board of Directors with the power to grant specific rights and restrictions with respect to the capital stock.

Standard Language 

ARTICLE 6. Capital Stock

a. Authorized Stock. The total number of shares of capital stock of all classes which the Corporation has authority to issue is [AUTHORIZED SHARES TOTAL] shares, consisting of:

i. [COMMON STOCK AUTHORIZED SHARES] shares of common stock, par value ($[COMMON STOCK PAR VALUE]) per share (the "Common Stock"); and
ii. [PREFERRED STOCK AUTHORIZED SHARES] shares of preferred stock, par value ($[PREFERRED STOCK PAR VALUE]) per share (the "Preferred Stock").

b. Common Stock.

i. Voting Rights. [Except as provided under the terms of any series of Preferred Stock,] The exclusive voting power shall be vested in the Common Stock, the holders thereof being entitled to one vote for each share of such Common Stock standing in the holder's name on the books of the Corporation.
ii. Dividends. Subject to any rights and preferences of any series of Preferred Stock, holders of Common Stock shall be entitled to such dividends as may be declared by the Board of Directors out of funds lawfully available therefor.
iii. Distributions Upon Liquidation. Upon any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, holders of Common Stock shall be entitled to receive pro rata the remaining assets of the Corporation after the holders of any class of stock having preference over the Common Stock have been paid in full any sums to which they may be entitled.

c. Preferred Stock. The Board of Directors is hereby expressly authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each such series, and to fix the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the shares of each such series.

d. Majority Vote. Notwithstanding any provision of law requiring the authorization of any action by a greater proportion than a majority of the total number of shares of all classes of capital stock or of the total number of shares of any class of capital stock, such action shall be valid and effective if authorized by the affirmative vote of the holders of a majority of the total number of shares of all classes outstanding and entitled to vote thereon, except as otherwise provided in these Articles.

Optional and Alternative Language

1. Restriction on Voting Rights

(a) No Restrictions

Example:
The holders of common stock shall be entitled to have unlimited voting rights on all shares and be entitled to one vote for each share on all matters on which shareholders have the right to vote.

(b) Restrictions on Voting Rights of Large Shareholders 

Example:
Restrictions on Voting Rights of the Corporation's Equity Securities.

(a) Notwithstanding any other provision of the Charter, in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of stockholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of Common Stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all Common Stock owned by such person would be entitled to cast after giving effect to the provisions hereof, multiplied by a fraction, the numerator of which is the number of shares of such class or series beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such person owning shares in excess of the Limit.

(b) The following definitions shall apply to Restrictions on Voting Rights of the Corporation's Equity Securities.

(i) An "affiliate" of a specified person shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.
(ii) "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or statutory provision thereto, pursuant to said Rule 13d-3 as in effect on September 30, 2011; provided, however, that a person shall, in any event, also be deemed the "beneficial owner" of any Common Stock:
(1) which such person or any of its affiliates beneficially owns, directly or indirectly; or
(2) which such person or any of its affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with the Corporation to effect any transaction which is described in any one or more of the clauses of Section A of Article 9 hereof) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such affiliate is otherwise deemed the beneficial owner); or
(3) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation;
and provided further, however, that (i) no director or officer of the Corporation (or any affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Common Stock beneficially owned by any other such director or officer (or any affiliate thereof), and (ii) neither any employee stock ownership or similar plan of the Corporation or any subsidiary of the Corporation nor any trustee with respect thereto (or any affiliate of such trustee) shall, solely by reason of such capacity of such trustee, be deemed, for any purposes hereof, to beneficially own any Common Stock held under any such plan. For purposes of computing the percentage beneficial ownership of Common Stock of a person, the outstanding Common Stock shall include shares deemed owned by such person through application of this subsection but shall not include any other Common Stock which may be issuable by the Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding Common Stock shall include only Common Stock then outstanding and shall not include any Common Stock which may be issuable by the Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise.
(iii) A "person" shall mean any individual, firm, corporation, or other entity.

(c) The Board of Directors shall have the power to construe and apply the provisions of this Section D and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of Common Stock beneficially owned by any person, (ii) whether a person is an affiliate of another, (iii) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of this Section D to the given facts, or (v) any other matter relating to the applicability or effect of this Section.

(d) The Board of Directors shall have the right to demand that any person who is reasonably believed to beneficially own Common Stock in excess of the Limit (or holds of record Common Stock beneficially owned by any person in excess of the Limit) (a "Holder in Excess") supply the Corporation with complete information as to (i) the record owner(s) of all shares beneficially owned by such Holder in Excess, and (ii) any other factual matter relating to the applicability or effect of this section as may reasonably be requested of such Holder in Excess. The Board of Directors shall further have the right to receive from any Holder in Excess reimbursement for all expenses incurred by the Board in connection with its investigation of any matters relating to the applicability or effect of this section on such Holder in Excess, to the extent such investigation is deemed appropriate by the Board of Directors as a result of the Holder in Excess refusing to supply the Corporation with the information described in the previous sentence.

(e) Except as otherwise provided by law or expressly provided in this Section, the presence, in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast one-third of the votes (after giving effect, if required, to the provisions of this Section D) entitled to be cast by the holders of shares of capital stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders, and every reference in the Charter to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for stockholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock.

(f) Any constructions, applications, or determinations made by the Board of Directors pursuant to this Section D in good faith and on the basis of such information and assistance as was then reasonably available for such purpose, shall be conclusive and binding upon the Corporation and its stockholders.

(g) In the event any provision (or portion thereof) of this Section shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Section shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its stockholders that each such remaining provision (or portion thereof) of this Section remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, including stockholders owning an amount of stock over the Limit, notwithstanding any such finding.

Discussion

 1. Capital Structure

"The capital structure should be kept as simple as possible and be within a range of 'normalcy' to a potential outside investor for credibility purposes. A common initial structure is to authorize 10 million shares of common stock and 4 million shares of preferred stock. A 'blank' preferred stock provision is often included in the articles of incorporation to permit the Board to create a series of preferred stock with special rights and privileges for a venture capital financing without additional shareholder approval. Not all authorized shares of common stock are sold at the founding stage. After initial sales to founders, there are usually only about 3-5 million shares issued and outstanding and about 1-2 million shares reserved in the equity incentive plan.” Guide to Starting a Corporation, Fred Greguras, Fenwick & West.

 2. Choosing the Number of Shares

"My recommendation is based on my belief that startups should authorize 10,000,000 shares of common stock upon filing the its charter. The startup will then typically issue about 6,000,000 to 8,000,000 shares to its initial set of founders." How Many Shares Should a Start-up Company Authorize at Incorporation?, Startup Lawyer, October 10th, 2008.

“While at the outset there may not seem to be any difference between owning 100 shares or 1 million shares, a founder should purchase all of the units of stock he desires at the time of founding. Thereafter, a founder will generally lose control over further issuances and stock splits, particularly once a venture capital financing occurs. In addition, the purchase price will usually increase.” http://techventures.org/assets/images/uploads/Guide_to_Starting_Corp-1.pdf

3. Setting Par Value

"While I typically see par values of either $1 or “no par value” when looking at new client startups that have incorporated on their own, I typically recommend that a startup corporation’s Common Stock par value be set at $0.0001 to as low as $0.00001.
My recommendation is based on my belief that startups should authorize 10,000,000 shares of common stock upon filing the its charter. The startup will then typically issue about 6,000,000 to 8,000,000 shares to its initial set of founders." How to Set Par Value for a Startup CompanyStartup Lawyer, October 11th, 2008.

4. Preferred Stock

“Preferred stock (like common stock) is a class of capital stock created under a company’s certificate of incorporation (known as its charter) that typically entitles the holders to certain preferences and rights over the common stockholders.” Preferred Stock:
Overview, Spencer G. Feldman, Greenberg Traurig, LLP.
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