Founders who are incorporating their startup initially are usually faced with the question of what to set the “par” value of the business’ stock. This is a question I’m regularly asked about as a Phoenix Startup attorney. In this post, we look at what par value is, why it remains important, and what you might want to set it at initially.
What’s a Stock’s Par Value?
While most of us who golf (or try to anyway) are familiar with the concept of “par” on the golf course, when it comes to corporations, par has a very different meaning.
It is a common misconception of startup founders is that par equates to market value. Although this can be true, it usually is not.
Put simply, par value is a minimum price that the issuing corporation can issue its corporate shares at. The idea is to set a price floor below which additional stock cannot be issued (potentially screwing existing shareholders).
The concept of par was borne out of the highly shall we say…speculative and very loosely regulated markets of the 1920s and 30s. It is basically an anachronism given today’s far more regulated corporate and securities environment requiring, in most cases, publication or other disclosure of issuance prices.
Is Par Value Still Important Today?
Although the corporations acts or laws of several states have done away with the requirement for par value altogether, par still can play an important role in, and merits careful consideration as part of, forming your startup as a corporation in a jurisdiction where par is necessary.
As in many states, here in Arizona par is established as part of the formation process in the preparation and filing of the initial “Articles of Incorporation”.
Oftentimes, founders who decide to incorporate on their own or through an online service gloss over the notion of par value by either choosing “$1.00” or simply “no par” as part of the process.
However, as you may have seen from a number of well-shared examples, doing this without at least some careful consideration can lead to some nasty and unintended surprises.
What Should My Company’s Par Value be?
Although it may not stroke their egos as much, I usually advise my clients who I’m working with on incorporation of their startup to have par value for their startup’s common stock set at “$0.001” or even “$0.0001” or less.
In other words, if out of authorized shares the corporation issues, say, 10 million shares to the initial founders at a “$0.0001” par value, the bare minimum the founders would have to pay for the shares would be a total of $1,000.
What this does is make sure that the original shareholders (typically the founders) are not having to come up with a ton of cash personally to purchase their initial shares. This can be especially welcome as the company later seeks third-party or outside financing from angels and venture capital, which usually results in a not insignificant increase in the per share value.
Again, Par Value is Not Market Value
It bears (re)mentioning that par value is not the same as market value or the actual worth of the company, which is usually set by either the private or (if your company is successful enough to attract the right attention) a public market.
If you are a founder or set of founders looking for guidance in setting up your startup company as a corporation, our Arizona startup law firm can advise on not only the basic incorporation issues such as par value but help you plan out and draft your initial, key startup documentation like corporate Bylaws, shareholder agreements, Board and shareholder resolutions, etc.
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a startup, technology, and e-commerce law practice advising founders and management teams on company startup, corporate and technology transactions, e-commerce, as well as Internet privacy concerns. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. Our offices are conveniently located along the Camelback corridor in Phoenix’s financial district. For more information about our Company Startup practice, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.