Board and Stockholder Approval of Equity Funding - Explained
Who has to approve the sale of an interest in the company to investors?
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What is Board and Stockholder Approval?
The investment process generally requires significant board and shareholder approval. First, in drafting the standard documents, the board of directors will need to initiate an amendment of the articles of incorporation (and potentially the bylaws) to accommodate the issuance of a preferred share of stock with the desired characteristics. The requirements for shareholder vote on the amendment of the articles varies with the state of incorporation. Most startups in a financing deal are organized or reorganized in Delaware.
Delaware generally only requires a majority vote of all outstanding stock and a majority of each class of voting stock in order to amend the articles. There are some limits on the requirement for class vote, depending on whether the amendment adversely affects the powers, preferences, or special rights of the class of shares. Since the issuance of a new class of shares does not necessarily affect existing classes, class approval may not be required. In any event, shareholders generally vote to increase the number of authorized shares as part of the process.
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