Beef of the Week: Share Certificates

I keep a running list of bad moves made in the early days of startups that have ended up costing my clients time and money. Here's one:

DO NOT send your individual shareholders their share certificates. They will lose them. Share certificates are the socks of negotiable instruments; you put two in the dryer, but only one comes out. This means that, just before you want to sell the Company, you will have to send a lawyer out to their house with a declaration of loss that must be sworn and signed, so that a new share certificate can be issued. Of course, chances are that the shareholder moved and forgot to advise you of their forwarding address. So your lawyer will be knocking on the door of the wrong house. Where an odd man who looks he may be involved in internet porn now resides.

Instead, keep the original share certificates in the corporate record books.

Also, DO NOT print your own share certificates. The forms you bought at the book store last week are not complete.The certificates need to contain proper legends that specify if: (a) there are restrictions on the transfer of the shares, (b) the rights are subject to a shareholders agrreement, and (c) if an "accredited investor" (in Canada) is purchasing the shares, the apporpriate language on securities law restrictions may also be added.

More later.