Company to reserve common stock: Overview, definition, and example
What does it mean for a company to reserve common stock?
When a company agrees to "reserve common stock," it means that the company has set aside a specific number of shares of its common stock for a particular purpose. This reservation is typically made in advance and ensures that the shares are available for future use, such as for stock options, employee compensation plans, or public offerings. Reserving common stock helps the company manage its share issuance and ensures that there are enough shares available for planned activities, such as granting equity to employees or issuing shares in a future funding round.
For example, a company might reserve 1 million shares of its common stock to be issued to employees as part of an employee stock option plan (ESOP) over the next few years.
Why is it important for a company to reserve common stock?
Reserving common stock is important because it helps a company plan for future needs while ensuring that there is sufficient equity available for various purposes, without having to issue new shares or dilute existing shareholders unexpectedly. For businesses, reserving common stock is crucial for effective financial planning, especially when the company plans to grant stock options, issue shares to raise capital, or provide stock-based incentives to employees.
For investors, understanding whether a company has reserved common stock can provide insight into the company's plans for growth, employee compensation, and its ability to issue additional shares without affecting the ownership structure.
Understanding company to reserve common stock through an example
Imagine a technology startup planning to go public in two years. The company has set aside 500,000 shares of common stock to offer in an initial public offering (IPO). These shares are reserved, meaning they are not available for other purposes, ensuring that the company has the necessary stock to offer to investors during the IPO without affecting the ownership structure or requiring additional shares to be issued.
In another example, a company might reserve 100,000 shares of its common stock as part of a stock option plan for its employees. These shares are set aside to allow the company to grant stock options as an incentive to attract and retain top talent.
An example of a company to reserve common stock clause
Here’s how a clause related to the reservation of common stock might look in a corporate agreement:
"The Company agrees to reserve 1,000,000 shares of its common stock for future issuance under the Company’s employee stock option plan. These shares shall be available for issuance at such time as stock options are granted to employees, and the Company shall not issue these shares for any other purpose without the approval of the Board of Directors."
Conclusion
Reserving common stock is a strategic action taken by companies to ensure they have sufficient equity available for future needs, such as issuing stock options, conducting public offerings, or fulfilling other commitments. By setting aside these shares, businesses can manage their share issuance effectively, providing flexibility for future growth and ensuring that stock-based compensation or fundraising activities are handled efficiently. Understanding the concept of reserved common stock is key for businesses in managing their equity and for investors in assessing the company’s potential for future issuance.
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.