Par Value: More Than Zero
“More than zero.” That is not the sequel to a novel by Brett Easton Ellis (this isn’t a literary blog). It is advice you might get when deciding what the par value of your company’s stock should be when you incorporate.
Par value is the lowest amount for which a share of stock can be sold by the company according to applicable state law. The par value of stock is not the same as the market value of that stock. You’ll need to set the par value of your common stock in your company’s Certificate of Incorporation (aka “Charter”) at the time of incorporation. So, along with your company’s name and the number of common stock shares you’ll authorize, it’s a decision you’ll need to make early on.
It is possible to set your stock’s par value at zero in some states—and that can be tempting. The reasons not to: filing fees and taxes. States usually charge enormous taxes for companies that have high quantities of authorized shares with no par value. Some states, including Delaware, make an exception for companies that have 5,000 shares or less, and this leads some companies to authorize only 5,000 shares at no par value. But any company that plans to raise capital or needs to incentivize employees with equity will likely wind up having to amend their Charter to authorize more shares and add a par value—and they will pay additional filing fees.
Only Slightly More Than Zero
So, not zero…but it needn’t be much more than zero. In fact, a fraction of a cent is the commonly recommended amount. Here at Shoobx, we chose to set our par value at $.0001 as our starting point. If you choose a substantially higher value, your founders and early employees will pay more than necessary for their founder shares and initial equity grants. Keeping par value low means that stock can be purchased affordably in early stages when the company is worth virtually nothing. Founders will typically grant themselves millions of shares if their company plans to grant equity to employees, so a par value as high as even $.01 can result in an out of pocket cost that is just too much to pay for a newly minted company.
For more information on how your number of authorized shares and par value affect your taxes, check out Harvard Business Services’ information on franchise tax. Delaware allows corporations to choose one of two methods to compute annual franchise tax—Assumed Par Value Method or Authorized Shares Method. You can experiment with your own tax scenario on the State of Delaware’s Franchise Tax Calculator.
The information contained in this post is most relevant for early-stage companies that want to raise outside capital and attract employees with equity. Contact your legal counsel if you have questions or concerns about par value.