Common shares: Overview, definition, and example
What are common shares?
Common shares are a type of stock that represents ownership in a company. When you own common shares, you are a partial owner of the business, and you may have the right to vote on important company decisions, such as electing board members or approving major changes. Common shareholders also have the potential to receive dividends, which are payments made by the company out of its profits, though these are not guaranteed.
In simpler terms, common shares are like a slice of the company pie, where owning a piece means you have some say in how the business is run and the chance to earn money from the company’s success.
Why are common shares important?
Common shares are important because they give investors the ability to share in the profits of a company and have a say in how it’s managed. For businesses, issuing common shares is a way to raise capital (money) without taking on debt. It also allows companies to attract investors who want to be part of the company’s growth and success.
For SMB owners, offering common shares can be a way to raise funds, incentivize employees, and share ownership with investors or partners, while still keeping control of key decisions.
Understanding common shares through an example
Imagine you start a small tech company and decide to raise money by issuing common shares. You sell 100,000 shares to investors at $10 each, raising $1 million for your business. Now, the investors who bought the shares own a portion of your company and can vote on key matters, like electing the board of directors. If your company grows and becomes successful, the value of those shares may increase, and investors may also receive dividends. If the company doesn’t perform well, however, the value of the shares could decrease.
Example of a common shares clause
Here’s an example of what a common shares clause might look like in a contract:
“The Company shall issue common shares to investors, providing them with voting rights and the potential to receive dividends. The number of shares issued, and the terms of the issuance, shall be determined by the Board of Directors. Common shareholders shall be entitled to participate in annual meetings and shall have the right to vote on all matters submitted to a shareholder vote.”
Conclusion
Common shares are an essential part of the ownership structure of many businesses. They provide investors with a chance to share in the success of the company and have a voice in how it’s run. For SMB owners, issuing common shares can be a way to raise capital and grow the business, while offering investors and employees the opportunity to participate in the company’s future success. Understanding common shares is key to making informed decisions about ownership and investment in your business.
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.