Par Value Defined

We’ve received a number of questions on Par Value since publishing this post, so wanted to provide a more detailed (but still short) explanation of Par Value as it pertains to stock and specifically as it relates to startup companies.

The first place to go for most definitions is Wikipedia, but in this case the information provided is limited, and overly broad in that it tries to encompass all equity situations.  Unless you truly need to be an expert on the topic, in which case you can search the Internet and find bits of info at a number of sites, here are the key things you ought to know about Par Value for Common Stock and Preferred Stock.

Par Value for Common Stock:

  1. It is an archaic concept.  In “olden” days, companies used to issue (sell) shares of common stock at Par Value, a price below which no other shares could be sold (by the company, secondary sales are a different matter).  Back when securities markets were not well regulated, this approach was intended to protect the purchaser and provide a simple accounting method as the par value per share times the shares sold was equal to the amount raised, which appeared on the balance sheet as Paid in Capital or Contributed Capital.
  2. Using Par Value can be avoided, but likely should not be.  Most states, including Delaware, allow you to form a corporation with “No Par Value” shares, meaning you do not need to assign a Par Value to the stock.  It can make the accounting and paperwork a little easier, but we do not recommend going this route because there are potential tax implications (Delaware Franchise Tax for instance), and since Par Value has been used “forever”, most legal and accounting materials factor it in already so the idea it can make this stuff easier is debatable. Over time as “No Par Value” becomes more common we expect it will be better to take this approach, but our basic view here is that if it “ain’t broke, don’t fix it”, and Par Value may be archaic, but it ain’t broke.
  3. Par Value for Common Stock should be set VERY low.  The only time Par Value really matters these days is when you issue the initial (ie Founders) stock in a company.  In most cases the Founders will purchase their shares at Par Value.  As a result, for a set number of shares, the cost of purchasing founders shares will be directly proportional to the Par Value per share.  We have a post on Setting Par Value that is worth reading if you are putting together a new company and trying to figure out what to do with the Par Value.

Par Value for Preferred Stock is a little different and still matters (sort of):

  1. For Preferred financing rounds, the Par Value for a series of preferred stock is usually set at the price paid per share in the financing round.  In this case, the par value is specific to a single series of preferred, so if you issue multiple series (ie Series A, Series B, Series GG, etc.) each will have a different par value (unless two rounds are completed at the same price per share).
  2. This only “sort of” matters because with venture-backed companies, the terms of the investment typically limit the number of shares that can be sold of the series of preferred to a number that is slightly higher than the number actually sold in the financing (the difference leaves room for warrants or a small sale of shares in the series later on, for instance to a debt provider or outside board member who wants to invest in the latest round when they join the board).  As a result, without a Par Value floor in place, investors in that round would still be protected from the company selling a lot more of that series of stock at a discounted price because there is very little left to sell (not to mention the investors will typically have a number of rights that would prevent this from happening even if there were more shares available to sell).
  3. Par Value for Preferred Stock is usually the basis for things such as dividend calculations as well as liquidation preferences and anti-dilution protection. Again, it only “sort of” matters because most financing documents do not refer to Par Value when setting these terms, they simply refer to a price per share or dividend payable per share, which in most cases is calculated off of the price paid per share.  As such, you really do not need to worry about the Par Value of the preferred stock, it will never be a term you negotiate on (as opposed to price per share and overall valuation, which we trust you will negotiate in earnest).  In other words, you can pretty safely leave this to the lawyers (and we do not say that often….).

That’s it on Par Value.  If you still have questions, think we missed any useful points, or (god forbid) got something wrong, please post a comment and let us know.