Certificate-Free and Certificated Stock Issuance
It’s 10x simpler to issue securities, track ownership, and conduct corporate transactions over the long term without stock certificates, so we recommend that all YC companies incorporate this way.
- Nicole Cadman, General Counsel, Y Combinator
In the past, it was necessary for companies to prepare a paper certificate to represent shareholder ownership in the company. The paper certificate needed to be presented for dividend payout and collected for corporate transactions.
More recently, stock certificates became digital, in the form of PDFs with digital signatures. But they still need to be created, signed, delivered and tracked over the lifecycle of the whole company. This takes a lot of time and money.
Public markets have entirely abandoned certificates. Through the Direct Registration System (DRS), the SEC allows securities to be registered on the company's internal ledger:
In 1977, the concept of the “uncertificated security” was introduced in Article 8 of the UCC. This innovation allowed issuers to issue uncertificated (i.e., certificateless) book-entry securities, the transfer of which is greatly simplified compared to the transfer of certificated securities because transfer can be effected and protected purchaser status can be achieved by simply registering the transferee’s name on the books of the issuer.
- U.S. Securities and Exchange Commission
Like the SEC, all U.S. states allow private issuers to issue stock without certificates, paper or digital. Forward-thinking players in the startup ecosystem like Y Combinator and Orrick fully adopted this approach because of the significantly simplification and reduced cost. Certificate-free issuance is also what we recommend, and we built Captable.io to fully support it end-to-end.
Here’s a detailed side-by-side comparison:
|Certificate-free||Certificated (Including Digital Certificates)|
|Ease of issuance||✅ Easy. Deliver a Notice of Issuance of Stock to the shareholder digitally, and it doesn’t need any signatures.||Require multiple company officer signatures and shareholder acceptance.|
|Ease of tracking and verifying ownership||✅ Easy. Company owns the single source of truth in the digital stock ledger, so stock cannot be transferred without company’s knowledge.||Can be difficult to maintain transfer restrictions and track down owners of unnoticed transfers.|
|Manage physical paperwork||✅ None. No chance of being lost or stolen. Nothing to sign.||Yes. Digital stock issuance helps eliminate physical paperwork, but there are still extra digital records and signatures to manage.|
|Manage with software||✅ Yes. Can use basic spreadsheets, or advanced cap table management solutions like Captable.io.||✅ Advanced cap table management solutions like Captable.io help track stock certificates and paperwork.|
|Cost of compliance, audit and corporate transactions (M&A, IPO, etc.)||✅ Minimal. Less records to track and cleanup, especially with software cap table management solutions.||High. May require costly cap table and paperwork cleanup before a transaction.|
|Transfer agent need||✅ Company can be its own transfer agent.||May need a transfer agent if you have a large number of investors. This also means that you’re tied to a specific vendor and your cap table data is less portable. See related article for more info.|
|Ease of adoption||✅ See below for a few simple steps to take.||✅ Most incorporation templates and legal advisors still use this approach.|
Adopting certificate-free stock issuance
If you’re about to set up a company, ask your lawyers or the incorporation service you're using to adopt certificate-free stock. There should be no cost or even a discount because you don’t need any “starter stock certificates”.
If you’re already incorporated, and your corporate bylaws allow both uncertificated and certificated stock, making your company certificate-free is as simple as having your Board approve a company resolution. Here's the language to use. If your corporate bylaws don't allow uncertificated stock, you can use this language to update the bylaws with your Board approval.
With that done, you can implement a digital stock ledger using a spreadsheet or a software solution like Captable.io.
Issuing certificate-free stock in Captable.io
Captable.io is a free public service that’s optimized for certificate-free stock issuance. It also supports tracking and shareholder acceptance of stock certificates and related paperwork. See related articles on stock issuance workflows in Captable.io.