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
Background
In the past, it was necessary for companies to prepare a paper certificate to represent stakeholder 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 LTSE Equity to fully support it end-to-end.
Here’s a detailed side-by-side comparison:
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Certificate-free Certificated (Including Digital Certificates)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 LTSE Equity.
Issuing certificate-free stock in LTSE Equity
LTSE Equity is a free public service that’s optimized for certificate-free stock issuance. It also supports tracking and stakeholder acceptance of stock certificates and related paperwork. See related articles on stock issuance workflows in LTSE Equity.