Certificate of designations: Overview, definition, and example
What is certificate of designations?
A certificate of designations is a legal document filed with a state’s secretary of state or similar authority that outlines the rights, preferences, and limitations of a specific class or series of preferred stock. It is typically used by corporations to formally establish the terms of a new stock class—such as dividend rights, voting power, liquidation preferences, and conversion rights—without amending the full corporate charter.
Why is certificate of designations important?
This document gives investors and companies clarity about what rights attach to a particular class of preferred shares. It’s especially important in venture capital, private equity, and M&A transactions where different classes of investors may negotiate for enhanced protections or financial terms. Without a properly filed and clear certificate of designations, those rights may not be enforceable. It also ensures compliance with corporate law and gives notice to regulators and shareholders about the structure of the company's equity.
Understanding certificate of designations through an example
A startup raises a Series A round from institutional investors and agrees to grant them preferred stock with a 1x liquidation preference, anti-dilution protection, and non-cumulative dividends. Rather than rewriting the entire certificate of incorporation, the company files a certificate of designations outlining the rights of the Series A Preferred Stock. This document becomes part of the company’s official public record and governs how those shares function moving forward.
Example of a certificate of designations clause
Here’s how a certificate of designations clause may look like in a contract:
"The Company shall file a Certificate of Designations with the Secretary of State of the State of [State], setting forth the rights, preferences, privileges, and restrictions of the Series A Preferred Stock, including without limitation its dividend rights, liquidation preference, conversion rights, and voting rights, as approved by the Board of Directors and in accordance with applicable corporate law."
Conclusion
The certificate of designations is a key governance tool for issuing and managing preferred stock. It formalizes the negotiated terms of a stock class, ensures legal enforceability, and creates a transparent record for investors, shareholders, and regulators. If your business is raising capital through preferred equity, this document is essential to protect everyone’s rights.
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.