Taking Equity in Lieu of Payment - Things you need to know

Taking shares for your fee is an excellent way to create upside for your consulting work, but make sure you are being smart about the transaction.

Corporate bylaws play a key role in the internal functionality of how a corporation works. Within these bylaws, there will be vital information pertaining to specific structures that create the foundation of the corporation. To be sure certain protections are in place for not only the corporation, but potential shareholders and board members - it is important to have information in the bylaws rather than leaving it open to interpretation.

This legal document should be all encompassing and have a section to explain what your corporation does and why. While every state has different rules and regulations pertaining to corporate governance and bylaws, here are some general ideas to think about when outlining your corporation’s bylaws.

Shareholders

1. Shareholders control sitting Board of Director members. They own shares of the company through the stock they own, therefore each own a portion of the company. The shareholders elect the Board of Director members.

2. A good thing to include in the corporate bylaws regarding shareholders is information about the annual shareholder meeting and what that entails.

• What is reviewed: performance, finances, bylaws, elected and electing officials within the corporation, those elected officials’ term length in the company, and the standing of the corporation

• When and how the meeting should be conducted. The shareholders must receive notice of the meeting before it takes place - usually at least 21 days before the meeting

• The first annual meeting should be held no later than 18 months after the corporation is first incorporated

Board of Directors

1. The Board of Directors are members elected by the shareholders of the company and directly report to the shareholders. Typically, they oversee the daily operations of a corporation.

2. The number of members on the Board is imperative to making decisions, as you can run into a stalemate while voting on decisions. This is important for shareholders to consider if and when electing new members to the Board.

3. The members on the Board oversee the officers of the company; this can include the CEO, CFO, COO, President, Vice President, etc. Officers can, but are not always required to be, on the Board of Directors.

4. It is important to think about the formation of committees within the Board as they can be helpful tools when a problem arises. A committee is a group of people within the Board with specialized skillsets to oversee problems. These committees can be standing (permanent) or ad hoc (temporary.)

5. While unpleasant but necessary, sometimes the removal of a Board member must happen. Ensuring there is a clear process and if it requires cause or not will make this situation more clear if the situation comes up.

Voting and Rights of  Members

1. Indemnification:

1. Protection against any liability associated with the corporation. An example of this means if a member gets sued or has a pending legal action against them while they were acting on behalf of the corporation.

2. If there is a clause about indemnification, you can include how much protection is available and specific details about fees, costs, permissions, etc.

2. Voting:

1. The corporate bylaws can include information about how members can vote. This can include how often, by what means (if it must be in person or if it can be virtual), and voting criteria.

1. Quorum = how many current sitting members must be present for a vote to pass on an issue 

2. Majority vote= how many votes must be cast for something to pass

Stocks

Stocks should be issued to shareholders before your corporation begins conducting business. Stock is distributed to shareholders in the form of a share. A shareholder will receive a stock certificate verifying ownership of the number of stocks they received.

1. It may be ideal to include a section in your corporate bylaws pertaining to who is eligible to receive stock, how it is disbursed and distributed, and the different classes of stock.

2. Different types of stock are considered Common Stock and Preferred Stock:

1. Preferred stock is generally higher priority than common stock and has preferential rights associated with owning it:

• Voting on company issues

• Receiving dividends

• The right to sell your number of shares back to the company, otherwise known as Redemption Rights

• Stocks are protected against the value of the company, also known as Anti-dilution

• By owning preferred stock, someone has the right to buy available stocks before common stockholders, this is known as Rights of First Refusal

2. Common stock has less guarantees and protections for the amount of owned stock

Amending the Bylaws

Change is inevitable, you want the ability for members to vote on a change or amendment to any provisions in the bylaws that no longer serve the corporation or if a provision must be changed according to the law.

Corporation Protections 

1. To protect the corporation, all members must divulge any information pertaining to current or potential conflicts of interest.

Though not all encompassing as to what will be included in your corporate bylaws, these are some important points to consider adding to reduce risk for your corporation as well as the people involved. As always, we are here to help you navigate these and other pitfalls of growing your business and vision.