Reservation of shares: Overview, definition, and example
What is reservation of shares?
Reservation of shares refers to the practice of setting aside or reserving a certain number of shares for a specific purpose, such as for future issuance to employees, investors, or as part of a public offering. The reserved shares may not be immediately available for sale or transfer but are earmarked to be used at a later date, often with specific conditions attached. This practice is common in the context of stock options, initial public offerings (IPOs), or rights offerings, where a company wants to ensure that shares are available for certain stakeholders or strategic purposes.
For example, a company may reserve a portion of its shares for an employee stock option plan (ESOP) to provide future benefits to employees.
Why is reservation of shares important?
Reservation of shares is important because it provides flexibility to companies in managing their equity and ensuring that shares are available when needed for specific purposes, such as rewarding employees or raising capital. By reserving shares in advance, a company can effectively plan its capital structure and avoid issues related to insufficient shares when strategic opportunities arise.
For businesses, reserving shares helps maintain control over equity distribution and allows for effective management of stock issuance in response to future events or funding needs.
Understanding reservation of shares through an example
Imagine a startup that is preparing for an IPO but wants to reserve 10% of its total shares for key employees and management as part of an employee stock option plan. The company sets aside these shares, ensuring they are available for grant to employees once the IPO is complete, without issuing new shares or diluting the existing shareholders.
In another example, a company reserves shares to be issued to existing shareholders in a rights offering, allowing them to purchase additional shares at a discounted price, helping the company raise funds while providing its shareholders with the opportunity to maintain their ownership percentage.
An example of a reservation of shares clause
Here’s how a reservation of shares clause might look in a contract:
“The Company shall reserve [Insert Number or Percentage] of its authorized shares for issuance under the Employee Stock Option Plan. These shares will be allocated to employees at the discretion of the Board of Directors, subject to the terms and conditions of the Plan.”
Conclusion
Reservation of shares is an important practice for businesses to manage their equity and ensure that shares are available for future strategic uses, such as employee incentives or capital raising. By clearly reserving shares for specific purposes, companies can maintain flexibility in their financial planning and protect their ability to act on future opportunities.
Including a reservation of shares clause in agreements ensures that the company has control over its share allocation and can meet future needs without unexpected delays or challenges.
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.