Stock distribution and assignment - what tools to use, how to use them - basics by Yev Muchnik, expert in securities transactions.

This is Fundraising Radio and this is our fourth educational episode. As a guest speaker today, we'll have Muchnik who participates on part of fundraising radio prior to this one. I thought that the previous episode was so good that we should just do several educational episodes just right after that episode. In this episode, we're going to talk about stocks, how do you put them on the ledger, how to keep track of them, how do you make sure that all of your teammates legally own stocks of your company, etc.
Yev, take it off from here and tell us about the stocks. Let's start with the first things first - what should you do first to distribute the stocks?

Sure.

Thank you again for having me on this educational episode.

in terms of dispersing or issuing stock from my company to shareholders or members in the case of an LLC, some, depending on the jurisdiction of the company where it's incorporated, and, or where the issuance is the laws under which it's governed by the stock can be certificated or uncertificated.

for example, in Delaware you can issue, stock without actually having it tied to a certificate.

That's why, there are a number of different types of stock management softwares out there or cap type cap, table management softwares available, or software available, including the most popular one, which is Carta.

it's the most popular one because it has so many different features. The UI, UX is very easy to navigate.

It has a lot of other functionalities, that the company has added like the four Oh nine eight evaluations, board resolutions.

even now they're introducing, another offering through Carta called Carta X, which is a private equity, platform, like a, an, a vehicle to sell, equity in private companies.

almost like a, an IPO, but for private companies.

settling and managing your company's cap table and securities in, something like that is really the preferred way to go.

Most investors are also very familiar with how it works and it just makes you look like more of a legitimate company that has its, it's kind of company organizational documents in place.

Cardosa provides a data room for all of your historical organizational, corporate documents, so that investors can just go into one place and look through everything.

stock issuances, like I said, can be managed in that software, and it's a fantastic way to do so. But, again, there's different kinds of stocks that you may be issued.

for example, you could be issued options which invest over a certain period of time and then you have to exercise those options to actually become a holder of the stock outright.

you'd have to pay some kind of a strike price, once that option has vested or you could be granted something called restricted stock units or the research that suck award.

those are subject to a, restrictions by the companies such as they were purchased. Right.
and also potentially to vesting.

So, first of all, before we move on to distributing stalks and using actually that software, which by the way, what's the name of that software again? I already forgot it.

It's called Carta C. A.
Alright.
Carta.

Alright, I'll try to remember that.

before we move on to how to use Cardo, I wanted to ask you about the restricted stock units.

how exactly does this work? Can it, is it like stock option or is it, do you have to actually acquire it or, yeah.

Yep.

you would, so that the company would issue you something, call over through an instrument called the restricted stock purchase agreement.

You would be granted a certain amount of restricted stock.

there would be a price that is attached to that stock per each stock unit.

that is typically for early stage companies.

It's typically the par value or some very nominal amount.

you can make payment either in cash or you cancel any debt that the company has to you or you could do it in lieu of services or intellectual property.

it doesn't necessarily have to be paid for or paid up in cash.
once you are granted or purchase that stock, you have all the rights associated with that stuff as a stockholder.

on a cap table, you would come up as, if you were granted a thousand shares of restricted stock, you would come on the come up on the cap table as the owner of 1000 shares.

Whereas if you were granted options, you would only have the rights associated with the amount of options that have bested and that you have exercised or purchased.

Right.

since this is fundraising radio, you mentioned something that really caught my attention, which is you can forgive the company some debts that he owns to you through certain stock options.

I was curious, can accompany, do that, can they borrow from its own employees? Where do you mean by not paying them a salary for some time?

it depends how it's structured. Yes.

It, and it also, I mean, it depends on the jurisdiction of the company so that the regulations don't, or that the, the corporation act, it doesn't prohibit it.

also that the governing documents have nothing in them that would prohibit a law by the shareholders or the members to the company.

Oh, that's really interesting.

now it's time to go back for us to, to the main topic of this episode.

it's, how do you distribute this? Talk some on your team and investors.

have you, I assume that you have experienced with Carlo.

I personally have non-experienced so if I ask something dumb then maybe we're on the right track because probably our listeners have the same question.

first things first, where do you start? Obviously you register and then what happens then some you like give us. Yep.

Carta has a fantastic customer service support team and if you are working with an attorney, a lot of attorneys already have a preferred relationship with Carta, so they would onboard or help you onboard onto Carta or you could do it yourself as a startup.

and they have different pricing options.

I don't know exactly what it is currently, but they had a lot of, promotions for small startups with limited amount of shareholders and limited about, of invested capital that would make the software free.

you would speak to an account, you would get assigned to an account manager and then you would onboard and, stage your cap table for example, of how, before publishing it live and assigning, E E certificates or shares to each shareholder, I guess.

Well we're generally talk about this being a corporation or when we're talking about kind of stock in this conversation.

I guess the default would presumption would be that we're talking about a corporation rather than the LLC. Yeah, of course.
Of course.
We're talking about descender C Corp till we're incorporated.

I prefer that as, I think that it's like standard, a golden center of therapy industry. we're just sticking to the standard.

what happens next? How do you, when do you sign something? So who needs to sign this? First of all? So when I decided that I wanted to give my, co-founder, 30% of the shares, actually not Michael fund, they might employee 10% of the share of the company.

one size may need to sign this.

you would typically enter into some agreement, and that would typically look like a stock purchase agreement or a recepted stock purchase agreement.

in there you would detail kind of all of the representations that are being made by the purchaser, which, again the purchaser doesn't necessarily mean investor.

It means it means a founder or the core team, the initial team, and then the representations that are made by the company.

and, and incorporating some of the, the organizational documents of the company, like the bylaws or any shareholders agreements.

Got it.
the sale is done to the investor, how does this work? So, first transfer your shares or her shares or first, yep.

you would need to enter again into some a, depending whether you were issuing common stock to the investors or preferred stock, you would also enter into a preferred stock purchase agreement or a stock purchase agreement.

there would be a number of conditions of closing for that transaction, including, getting all of the correct corporate approvals and then also evidencing that the stock, belongs to that purchaser owner or investor, the stock ledger of the company.

Got it.

I actually ran out of questions that you've, there's something we need to cover here specifically because my permission.

I would just say that one of the key, another key considerations.

I just ran across this not too long ago with a Techstars company, that just because you sign a purchase agreement, you have to make sure that the stock issued in accordance with whatever jurisdiction you, that is the governing law or of the agreement or the jurisdiction of the, where the car companies incorporated.

just because, the purchase or the purchase agreement or investment agreement has been signed, there may be some other formalities, corporate formalities, like a resolution which is needed in order to perfect the issuance.

guys.

here, I want you to take it a little step away from, our main topic, which is stocks and, stomach agreements and all this stuff.

And talk a little bit about bylaws.

you mentioned that, based on the bylaws and those documents that you initially signed that actually give guidance to the corporation, it depends on who needs to sign this, stock sale agreements.

let's tell how do you create bylaws? How do you take a template from the web and put your name in it or how exactly do you do this?

they're, I mean generally if you need to put something together very quickly and there's enough, especially for Delaware companies, there are enough templates that are available online that are probably fairly easy to model after.

Cooley go has, great startup incorporation package, that you can kind of guides you in order to build those initial incorporation documents that have been tried and tested.

a lot of investors have seen many, many times over. that would really be the best, starting point.

Good, good.

Got it.

yeah, the lineup for the, for this episode I think is that, just figure out how car to work.

So it's C, a R T.

I'll leave the link in this episode for sure.

I personally don't see pricing here right now.

It just says get a demo or contact sales.

Who the hell buys the phone number? They're attended.

It's 21st century people come on.

No one, anyone.

Especially in the startup world.

Seriously.

All right.

thanks a lot of you for coming up and for sharing your experience in that field.

I was actually helpful for someone, some of our really for dealing with this right now or who might,

I will also drop another name of another up and coming a company that's called Aqua start, E Q.

U a S T, a R T.

they are using, they're built on the blockchain.

they're using blockchain technology for the ledger to record, the stock transactions on the blockchain technology.

Recent.
Just finally some use of a blockchain technology. I'm just kidding.
But yeah, we'll wrap it up here.

Thanks a lot for coming up and for sharing your knowledge in this field of stocks, which I'm still a bit confused about.