Investors in a priced funding round typically receive preferred stock, which offers features such as liquidation preference, dividends, conversion, and voting rights. With blank check preferred stock, the company’s board of directors has broad authority over those rights. Instead of those features being fixed, the board can adjust to financial needs that change over time.
Below, we’ll discuss how blank check preferred stock works, why startups use it, and important considerations for founders.
Key takeaways
Blank check preferred stock is a class of preferred shares authorized in a company’s certificate of incorporation without fixed rights, preferences, or terms.
This authorization grants the board of directors the authority to set the terms of new preferred series at the time of issuance.
The board can create a new series without shareholder approval, which allows startups expecting multiple financing rounds to issue new preferred shares without delays.
Founders should consider dilution concerns for shareholders, broad board discretion over terms, and the impact of a fixed cap on authorized shares.
What does blank check preferred stock mean?
Blank check preferred stock is a class of preferred shares authorized in the company’s certificate of incorporation. These shares come without fixed rights, preferences, and terms, giving the board authority to determine those features when the company issues the shares.
How does blank check preferred stock give companies flexibility?
The certificate of incorporation sets the maximum number of shares the company can issue, and it must also describe the preferences, rights, and limitations for each class or series of shares the company issues.
If the board wants to issue new shares that aren’t included in the certificate of incorporation, it must amend the document. That process requires a stockholder vote before filing the amendment with the state.
When included in the certificate of incorporation, blank check preferred stock allows the board to define the terms later rather than in the certificate.
This flexibility lets the board of directors create new series of preferred stock quickly when a financing opportunity arises. The board can also adjust the terms of the series based on the financial needs of the company without needing to amend the certificate of incorporation or seek stockholder approval.
Why do startups include blank check preferred stock early?
Venture-backed startups typically expect multiple financing rounds, and it’s common for the terms of each funding series to change.
Including blank check preferred stock in the certificate of incorporation from the outset can simplify the negotiating and issuing of new preferred shares as the company raises additional capital.
The alternative, which involves getting a shareholder vote and amending the certificate of incorporation, can delay the financing process and add legal fees.
How do terms get set later?
When the board of directors decides to issue a new series, it will file an article of amendment, also called a certificate of designation. This document specifies the terms for that series, such as liquidation preference, dividend rights, voting rights, and conversion terms.
The certificate of designation amends the certificate of incorporation only to the extent of the new series. It leaves the rest of the certificate unchanged and does not require shareholder approval.
Examples of terms that can be set include:
Basic details: The name of the series and how many of the authorized shares are included
Liquidation preference: How much shareholders receive and in what order if the corporation is dissolved
Dividends: Whether shareholders receive dividends, how the company calculates them, and whether they accumulate
Voting rights: Whether the shareholders can vote and potential limitations
Conversion terms: When the preferred shares can be converted and at what ratio
What are some key considerations for founders?
Although blank check preferred stock provides flexibility to the board, there are risks to consider:
Number of authorized shares: Although blank check preferred stock allows the board to set the terms of a new series without shareholder approval, it doesn’t change the maximum number of shares the certificate of incorporation authorizes. If your company reaches that threshold, you’ll need to hold a shareholder vote to amend the certificate.
Dilution: Each new series of preferred stock reduces the ownership share held by existing stockholders. Having a cap table can provide a breakdown of ownership and how it might change with new series rounds, letting investors plan accordingly.
Board control over terms: The board has broad discretion with the terms of new series of preferred stock, removing existing stockholders’ ability to negotiate. This could affect the negotiating leverage with future investors and existing stockholders in other areas.
What does blank check preferred stock look like in practice?
For example, suppose a company authorizes 10 million blank check preferred shares during formation. The certificate of incorporation specifies the number of shares, but it doesn’t detail the terms, leaving that up to the board.
Three years later, the company agrees on terms with a new investor. The board then files a certificate of designation to create a Series A Preferred Stock using three million of the preauthorized shares, with specific liquidation and voting terms for the new investor.
Because that action was authorized up front, it allows the board to avoid a full certificate amendment at the time of financing, which would require shareholder approval and legal costs. However, if the Series B and subsequent funding rounds require more than seven million preferred shares, the board would need to hold a vote to amend the certificate and authorize more.
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FAQs about blank check preferred stock
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.