Reservation of stock: Overview, definition, and example
What is reservation of stock?
Reservation of stock refers to the practice of setting aside a specific number of a company’s authorized but unissued shares for a defined purpose—such as stock option plans, convertible securities, or warrants. These reserved shares are not immediately issued but are earmarked for future use under specific agreements or plans.
Why is reservation of stock important?
This concept is key for managing ownership and planning equity-based incentives. By reserving stock, companies ensure that they have enough shares available to honor future commitments—like granting options to employees or issuing shares upon conversion of preferred stock. It also gives investors and stakeholders visibility into potential dilution and helps with compliance when setting up formal equity plans.
Understanding reservation of stock through an example
Suppose a startup wants to create an employee stock option pool of 10%. It will reserve 10% of its authorized shares for that purpose, even though those shares haven’t been granted yet. If the company also has convertible notes or preferred stock that could convert into equity, it may need to reserve additional shares to cover those as well.
Example of a reservation of stock clause
Here’s how a reservation of stock clause may appear in a contract:
"The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock the full number of shares sufficient to permit the exercise or conversion of all outstanding Options, Warrants, and Convertible Securities."
Conclusion
Reservation of stock ensures a company can meet future equity commitments without having to amend its charter or delay issuance. It’s a routine but important part of equity management, especially for startups and growth-stage companies that rely on stock-based compensation or convertible financing. Businesses should monitor reserved shares closely to avoid over-promising or triggering unintentional dilution.
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.