Availability of capital stock: Overview, definition, and example
What is the availability of capital stock?
The availability of capital stock refers to the amount of stock (shares) that a company can issue to raise capital. It represents the portion of the company's authorized shares that are available for sale or distribution to investors, typically to raise funds for operations, expansion, or other corporate needs. Capital stock is divided into two main categories: common stock and preferred stock. The availability of capital stock indicates how many shares the company has left to issue under its authorized capital, as determined by the company’s charter.
For example, a company may have authorized 1,000,000 shares of common stock, of which 600,000 shares are already issued. The remaining 400,000 shares represent the available capital stock that can be issued to raise additional funds or attract new investors.
Why is the availability of capital stock important?
The availability of capital stock is important because it determines how much equity the company can use to raise capital. A company with available capital stock can issue additional shares to investors, which can provide the necessary funding to support business growth, acquisitions, or debt repayment.
For businesses, knowing the availability of capital stock helps in planning for fundraising or securing additional capital through equity financing. For investors, the availability of capital stock provides insights into the company’s capacity for raising new funds without immediately diluting their ownership stake.
Understanding availability of capital stock through an example
Imagine a startup company that has authorized 500,000 shares of common stock. After completing a first round of funding, the company has already issued 200,000 shares to initial investors. This means that 300,000 shares of capital stock remain available for future fundraising rounds. As the company plans for expansion, it may decide to issue the remaining shares to raise additional capital needed to finance operations or product development.
In another example, a publicly traded company has authorized 10 million shares of stock, with 6 million shares already issued and outstanding. The company has 4 million shares available for future issuance, which it may use to raise funds through a secondary offering or to acquire other companies.
Example of an availability of capital stock clause
Here’s how an availability of capital stock clause might appear in a corporate agreement or funding document:
"The Corporation has authorized a total of [number] shares of common stock, of which [number] shares have been issued and are outstanding. As of the Effective Date of this Agreement, [number] shares of capital stock are available for issuance. The Corporation may issue these remaining shares as necessary to raise capital, subject to approval by the Board of Directors."
Conclusion
The availability of capital stock is a key aspect of a company’s financial flexibility and its ability to raise funds through the issuance of shares. By understanding the amount of available capital stock, businesses can plan for future fundraising, and investors can assess the potential for dilution and the company’s ability to secure additional capital.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.