Traditionally, companies issued physical certificates (known as stock certificates for corporations and membership unit certificates for limited liability companies) to their investors; however, in recent decades, the trend has been for companies instead to maintain a share registry and not issue physical certificates. For companies, especially closely held start-ups, this is a positive trend, and entrepreneurs should think twice before issuing physical share (or unit) certificates.
First, maintaining an electronic share (or unit) register on Excel or other data program is much more efficient than printing and mailing certificates. The same Excel spreadsheet that contains your current and historic cap tables can include the register.
Second, and perhaps more importantly, not issuing certificates can eliminate a lot of headaches when shares (or units) are canceled, sold, or transferred, in the event of a conversion, such as from a limited liability company to a corporation. Confusion and disputes can arise if shares (or units) are canceled, sold, or converted, and the physical certificates are not returned to the company or destroyed because those certificates may be used later to claim ownership in the company even though the ownership rights represented by the certificate were long ago canceled, sold, transferred, or converted. By not having physical certificates, the cancellation, transfer, or conversion of shares (or units) is easily effected by updating the share register and not worrying with collecting and/or destroying physical certificates.
In summary, while some might want a physical certificate to evidence or celebrate their ownership in a new venture, we strongly encourage our clients to simply maintain an electronic share register.
This blog was written by Hunter Business Law Attorney David Kronenfeld.
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