One way to raise capital for your business is to issue stock. There are many advantages to doing so, but also some drawbacks that are worth remembering. Because of those drawbacks, there are a few items to keep in mind when issuing stock.
Reasons to Issue Stock
Issuing stock can be beneficial for your business in the following ways:
Avoid The Liabilities Of Debt
The alternative to raising capital with stock is to go into debt. Often, this brings several drawbacks, including:
- High interest (especially for new businesses or those with low credit)
- Obligation to divert revenue toward loan payments
- Makes your business look riskier to investors
By issuing shares of stock, you’re able to avoid those liabilities.
Liquidity
In addition, selling shares of your company essentially converts it into a highly liquid asset that can be easily traded. If a founding member or an investor wants to sell their portion of the company for profit, it’s much easier for them to do so.
Attract Investors
Issuing stock is a great way to attract investors, as opposed to funding your company with debt, which could turn investors away. Investors typically compare the proportion of your company owned by shareholders to the amount owned by lenders. The more that’s owned by investors, the less risky your company is presumed to be.
Drawbacks to Selling Stock
Of course, issuing stock for your business does come with its drawbacks as well. These are well worth considering before you start looking for investors.
Diluted Ownership
When you issue stock, you’re selling portions of ownership over your company. That means you are considered to own less of your company, a principle called “diluting ownership.” As such, you’ll need to share profits and growth with your shareholders.
Less Control
Diluting ownership over your company may also reduce the control you have over it as a whole. Common stocks grant shareholders voting rights in your company, so you may find yourself with much less say over the decisions made in your company or the direction it takes in the future.
Legal Risks
Finally, there are many federal and state laws governing the issuing of stock, and it will be important to keep in line with those rules as you go about selling shares. An exact process needs to be followed, and you’ll likely need some legal guidance to do everything by the book. Otherwise, you potentially expose yourself to hefty fines.
Tips to Remember When Issuing Stock
When issuing stock, keep these items in mind:
- Price shares in a way that will give you flexibility while still covering expenses.
- Follow your Articles of Incorporation when determining how much stock you can issue.
- Always get approval from your company’s board in writing.
- Document everything.
- Keep in compliance with state and federal securities law.
Throughout the process, legal assistance is an absolute necessity, from making decisions on how to value your stock to drafting agreements and documents. Above all, it’s critical to keep in line with the complex regulations governing stocks and securities. As such, you’ll need an attorney to advise you on every step you take in this area.