How can I buy/sell shares?

In LLC to C corporation startup conversion, does fair market value matter to determine the par value and number of issued or authorized shares?

• Here's the situation: - My startup is currently a Delaware LLC with a decent amount of revenue - A few years ago, an investor bought 5% of the company for $2.5K (at a time when the LLC revenue was around $50K, which we assumed was the company's FMV) - The investor and I now want to convert the LLC to a C Corp (still in Delaware), but we'd like to minimize the DE Franchise Tax liabilities (given we're not sure we can actually raise any money - though that's the plan). Given the situation above, how many shares should we authorize and  at which par value? Specifically, must (number of shares x par value) match the current Fair Market Value of the company (e.g. current annual revenue) or can it be completely uncorrelated? I am asking the question because I was puzzled to find in the S1 prospectus of a company that had to convert from LLC to C Corp (in order to file for an IPO) that they had issued 500M common stock shares with a par value of $0.01, while the company was planning to raise $150M at a price of $15 per share (the company is question was Tri Pointe Homes LLC, now Inc). What struck me here is that the total value of the C Corp authorized shares was only $5,000,000, which did not even remotely reflect the company value a few months before the IPO. Of course, the S-1 filing does not provide information about how the LLC was originally structured, but since they quickly raised $150M from Starwood Capital Group after starting the LLC in exchange for 83.5% of the LLC capital, it's fair to assume that even a prior valuation was higher than $5M (though it's hard to say, of course). I do understand that the par value is the minimum price the shares must be sold at for any new investor and that the board may decide to sell at whatever price it wants (above the par value), but what I don't fully understand is whether any prior valuation event (whether formal or not) impacts the (par value x # of authorized shares) number. Practically speaking, since the company was previously valued at $50,000, is it still possible to authorize 10M common stock shares at $0.0001 per share or 5,000 shares at $1/share? (for a total of $1,000) Or do I need to adjust those numbers so that they at least match the last valuation event (and possible the current FMV)? [Of course, when I write "possible", I actually mean "legal" or advisable (because it's certainly technically feasible)]

• Answer:

  In general, a statutory conversion / reincorporation of an LLC to a C corporation is deemed to be a continuation of the original business entity and not a taxable corporate event. As such, there is no reason to state the company's valuation at the time of conversion, and no income tax effect one way or another of the part value chosen. There is no Delaware corporate requirement that the the par value reflect the current market or book vlaue of the company. Par value can be set low, as it would be for a new corporation. In most cases the par value and number of shares of stock should not affect the Delaware franchise fee, with some caveats. First, if you set the number of shares to be extremely low, you can pay a minimal franchise tax of $175 for the first 5,000 authorized shares, $75 for the next 5,000 shares, and $75 for each additional 10,000 shares (the "authorized shares" method), see http://corp.delaware.gov/frtaxcalc.shtml. Second, under the "assumed par value" method if a company: (1) sets a nominal par value, and (2) issues exactly as many shares as it authorizes, then the yearly tax is entirely dependent on the gross book value of the company's assets as reported to the IRS: $350 for each $1 million, rounded up to the next highest $350 increment. Third, if a company authorizes more shares than it issues, the tax goes up by that proportion (again, rounded up in $350 increments). Finally, setting the par value to be either zero, or higher than the per-share value of company assets, causes the assumed par value calculation to go haywire, so don't do it. There is a franchise tax calculator available at http://www.corp.delaware.gov/taxcalc.shtml to play around with different scenarios. Most small companies have assets far under $1 million, and allowing for a few extra authorized shares for future issuance would still be at the $350 minimum assumed par value tax fee. These companies can save $25 every year by authorizing 20,000 or fewer shares, $100 per year by authorizing 10,000 or fewer, and $175 by authorizing 5,000 or fewer. A company with assets (times the authorized to issued share ratio) of $2 million would have $350 more to save, and would realize some savings by issuing up to 60,000 shares. If your company is worth much at all, it is probably worth hiring a business lawyer or accountant to guide you through this. You should probably ask for advice on taxes and structure, but fiddling with things is probably going to cost more in added professional fees than you save on franchise taxes. Also, having too few shares at too high a price is going to be a problem if you ever need to raise money, or you need to work out vesting and employee incentive grants in a way that doesn't involve fractional shares. If you only issue 5,000 shares and you give somebody 0.2% of the company on a standard vesting program, that's 10 shares vesting over 48 months. Please note, this is not specific advice for your company, just a general discussion of Delaware taxes. Don't rely on it, hire your own professional!