When it comes to buying or selling startup stock, it’s important to understand the difference between par value and market value. In this post, we’ll explore the concept of par value for startup stock, including how it’s set, what it means for investors and a framework for par value in startups.
Understanding Par Value and Market Value for Startup Stock
Par value is the minimum share price, while market value is the current trading price.
Par value is set in the certificate of incorporation. For most startups, the par value is set incredibly low, generally $0.0001 or $0.00001 per share. This allows founders and early employees to purchase or receive shares for a nominal value.
However, if investors believe in the company’s growth potential, they may be willing to pay more per share than the par value. Startups will issue shares to investors at a price higher than par value. For instance, it would not be uncommon for the price per share in a Series A to exceed $3.00 per share while the par value remains at $0.00001 per share.
It’s important for companies and investors alike to understand the difference between par value and market value when buying or selling startup stock.
A Framework for Par Values for Startup Stock
Setting a par value for startup stock is not a one-size-fits-all approach. Different companies use varying values to set their par value. For instance, a company might set the par value at $0.0001 per share, while another might choose a slightly higher value, such as $0.01 per share. A common framework is that the total market capitalization (par value x authorized shares) should equal $100. Using that framework:
- If there are 10 million authorized shares, the par value should be $0.00001 per share.
- If there are 1 million authorized shares, the par value should be $0.0001 per share.
In conclusion, by setting a par value, companies can issue shares at a nominal value to founders and early employees while still allowing for potential future growth in share price.
