The Irrelevance of Stock Certificates for Startups

One of the more interesting “moments” for an entrepreneur is receiving your startup incorporation package from your lawyers.  In addition to the incorporation docs, you receive blank stock certificates.

When I received my package, I was reminded of the moments when my children were born.  What will become of them?  Will I be sitting in the audience smiling as they accept a Nobel prize, or will I hear those immortal words, “Will you be having fries with that hamburger?’

If you have been involved in a startup that has gone through a Chapter 11 (say, the company has some secured debt), and you are working on a restructuring plan, and there is more than one shareholder, your restructuring plan will require approval of the shareholders.  As a result, you will quickly understand that tracking down all the investors and their respective stock certificates is an expensive nightmare.

What if you are given a stock certificate by a company, and it’s not signed?  Do you go back to the CEO and say, “Uh, excuse me, thank you for the certificate, but it’s not signed.  Would you please sign it – so it’s real?”

So how do you get around the task of assigning shares, and sending out paper stock certificates?

Years ago, we made the decision to send a copy of the stock certificates to shareholders, with a letter that simply informed the investor/shareholder that our corporate counsel would hold onto the actual certificates.  We let them know that if that shareholder asked for the certificate, we would give it to them, but that our corporate counsel would maintain the stock register and would hold the actual certificates.  We learned that no one asked for the actual certificates.  The copy and the letter was sufficient evidence of ownership to them.  More importantly, when we needed the actual certificates, our corporate counsel had them all.  Moreover, our corporate counsel was very good at doing what corporate lawyers are supposed to do – maintain the register, and ensure that every document that needed to be signed, was actually signed by the right people.

If the partner at the law firm leaves their original firm, and you want to follow your lawyer, you will need to let all your shareholders know that there is a new firm that needs to be contacted.  This provides you with another opportunity to contact your shareholders, and let them know about all the great things that are going on, and how valued they are as a shareholder.  Alternatively, you can move the shares to a custody service, and let the shareholders know that this is what you have done.  Follow-up is essential in these cases to ensure that you still have current contact information about your shareholders, but the key point is that you still have all the actual stock certificates in one place – that is easily accessible.

Based on this experience, it seems pretty obvious to me that having corporate counsel hold the actual certificates is a creative and efficient solution to a potentially annoying situation.

About Richard Piotrowski, CFA

Richard Piotrowski, CFA, is a formerly a #1 ranked securities analyst, who has 20 years of experience building, dissecting, and fine tuning presentations, business models and valuation models of all kinds. The experience has been gained working in the investment community on both sides of "Wall Street", on "Bay Street" (Canada), as well as on "Main St." as Chief Financial Officer, Chief Operating Officer, as well as Evangelist and Marketing Director, where he focused on building messaging for solution sales opportunities based on value positioning, high ROI and fast payback. Richard joined Canada’s investment banking community in the early 1990s as an analyst following technology companies. He was recognized within two years by the Street, and was ranked "First" for Quality of Research in the survey of institutional investors conducted by an independent advisory firm – Brendon Woods. Richard was also the founding member of the internet technology research practice at two boutique investment banks.
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