Enforcing Written Cap Table Terms Against Early Unwritten Equity Promises
Written capitalization tables backed by integration clauses extinguish prior informal equity promises by establishing board resolutions as sole ownership records.
common stock
Meaning
Securities representing equity ownership in a corporation provide holders with residual claims on assets after all debts are paid. This class of common stock carries voting rights that allow the selection of directors and influence on corporate policy. If a company faces liquidation, these assets are distributed to other classes of security holders before the remaining funds reach the owners of the basic equity.
Residual Claim
Holders of basic equity participate in the financial upside of an enterprise through dividend payments and appreciation in share value. The distribution of dividends depends entirely on the board of directors making a formal declaration after satisfying senior obligations. When a company generates surplus cash, the board decides whether to reinvest those earnings or distribute them to owners.
This reinvestment should increase the future value of the firm, leading to capital gains for the holders of common stock.
Risk Allocation
Losses are restricted to the capital originally contributed to the enterprise, protecting personal assets from corporate creditors. This limited liability encourages investors to finance ventures without risking their entire wealth. However, the position at the bottom of the payout hierarchy makes these holdings highly sensitive to fluctuations in company performance.
Market Valuation
Trading on public exchanges establishes a continuous estimate of what the underlying business is worth. This activity provides liquidity to investors.