If you’ve recently started a new business or you’re considering it, you should note that running a business involves a lot of activities that require the assistance of capital. If you don’t have capital funds, you don’t have a successful business. Therefore, if you don’t have the funds yourself, you may need to look for outside capital, such as deciding to offer stock options.
You can obtain outside funding from investors in exchange for stock options in the company- but you must make sure that your company is a corporation. This will make it easier to issue and manage stock options. A corporation is owned by the shareholders, which can change over time.
Orcutt & Co. understands that running a small business is a major undertaking. We can take one of those responsibilities off your plate by handling your financials including payroll, accounting/bookkeeping tasks, and tax prep.
Benefits of Offering Stock Options
Stock options are advantageous for the company and the investors in several ways:
Records Ownership Stake
Stock options are issued to the founders, or shareholders, of the company to record their ownership. After joining and growing the company, the founders will typically contribute cash for the stocks, which infuses more capital into the company.
Raises Startup Capital
When a company is just getting started, the founders are only able to put so much money into it. Many times, this isn’t enough to start and grow the business. This is when the company would offer stock options to investors that are ready to fund the company.
Expands and Strengthens
Many times, a startup will offer stock options to outside investors in order to expand their business- and the money doesn’t have to be repaid.
Family and Friends Can Help
You can offer stock options to your family and friends in exchange for their help in funding your business. Most people will be more likely to help you with your venture if they know they’ll get something back on it in the future.
How to Offer Stock Options
If you have decided that you want to offer stock options, here are the steps to follow:
- Determine how much capital is needed. This will help you determine how many shares need to be issued and what the price should be.
- Determine how much stock can be issued. Your Articles of Incorporation will set the maximum number of shares you can issue to potential shareholders. You don’t have to issue them all, but you can’t go over that amount without a formal modification.
- Set the value of your stock options. Once you find out how much capital you need and how many stock options you can offer, you can determine how much they should be.
- Determine the class of your stock options: preferred or common. Preferred has no voting rights but has first claim of the profits and assets in the case of bankruptcy. Common has voting rights and can claim profits and assets in the case of bankruptcy- after the preferred investors are paid.
- Decide how many shares you plan to issue and make sure to comply with federal and state securities laws.
- Draft a stock subscription agreement outlining the details of the transaction. You will also issue certificates to every shareholder involved.
- Complete the transaction by receiving the cash and providing the share certificates.
Stock Options Can Help You Start and Grow Your Business
If you need capital to start and grow your business and you don’t have access to funding yourself, the best option is to offer stock options. While this will dilute your ownership in the company, it will give you the funds you need quickly.
If you need help managing your financials in Cincinnati, let Orcutt & Co. help. We are a small business, so we understand what it takes. We offer a variety of services including tax prep, payroll, and accounting/bookkeeping management.
