Equity financing for C corporations is relatively straightforward. C corporations are generally publicly-listed corporations that may issue stock to an unlimited number of investors. They use the money they receive in exchange for the stock they issue to fund their business operations. As the business becomes more successful and grows, the value of the stock increases and the stockholders earn profits and receive distributions.

Stockholders are granted distributions in the form of dividends, which are a payment by the company to the holders of the stock simply for being investors in the successful company. Issuing dividends is a good way for the corporation to signal that it is growing and has a good handle on its finances. Issuing stock options and restricted stock are the two most common ways that C corporations use equity to finance their operations.

Equity Financing

Stock Options: Stock options are a common form of equity provided by C corporations. As the name implies, stock options grant holders the option to purchase stock in the company. However, stock options do not grant the option holder an immediate share of the company at the time of the issuance. The parties generally agree upon a purchase price, stock quantity that is subject to the option and time frame applicable to the exercise of the option when they enter into the agreement. Stock options can serve to incentivize employees to work hard so that the stock price raises above the price of their stock option and they can purchase at below market value.

However, if the stock price is below the option’s buy price, the holder will not benefit from purchasing the stock and will therefore not exercise their option. Although stock options are available as a form of equity payment, they are fundamentally speculative. For this reason, investors should be very careful when agreeing to be compensated for their investments in a company with stock options. They must first understand the fundamentals of the option offered. To do so, they should ask themselves these three questions:
  1. What purchase price is offered?
  2. At what point in time may they exercise the option?
  3. Do they really believe that the company is headed in a good direction and that the stock price will rise within the window in which they may purchase the stock?
Restricted Stock: Restricted stock is another method corporations can use to compensate equity investors. Restricted stock is generally subject to vesting schemes. This means that it only becomes available to the holder after he or she achieves a certain predetermined goal.

For example, a holder of restricted stock may need to make sales to 25 clients, work for the corporation for 2 years or increase his or her productivity by 10% within a given time frame before the restricted stock vests. Like stock options, restricted stock serves to incentivize employees to work hard to increase the value of the company so that they can benefit individually. However, if an employee decides to leave the company before the restricted stock has vested, they are not entitled to the restricted stock.

For example, if Tom is entitled to restricted stock upon granting him 100 shares of Banana Electronics stock when he sells 100,000 computers, but decides to quit his job at Banana at any point before he has sold the 100,000 computers, he will not be entitled to the 100 shares of Banana Electronic stock. Therefore, it is important to understand when your stock will fully vest at the outset and be sure that you will be able to stay at the company until the stock fully vests.

Based in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in Raleigh, Durham, Chapel Hill, Wilmington, Charlotte and throughout the Southeast. We also represent venture capital funds and other investors who invest in companies located in New York, Silicon Valley and everywhere between. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on.  Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us. 
Categorized: Financing Resources