One question we occasionally receive at Kruze Consulting is about par value and its implications for startups. Your startup attorney will usually help you set a par value for your stock when you incorporate, and that’s going to end up on your company’s financials, so you may want to know what it represents. Let’s take a look at how par value impacts your balance sheet.
What is par value?
Par value is the nominal or face value assigned to each share of stock when your company is incorporated. Typically set very low (often a fraction of a cent, such as $0.0001), it’s more of a regulatory formality than a reflection of your stock’s actual market value.
Although par value doesn’t impact your startup’s valuation or stock price, it’s used for:
- Regulatory compliance. Certain jurisdictions require par value when incorporating or issuing shares.
- Minimum price floor. In theory, par value sets the lowest price at which shares can legally be issued. Violating that minimum price can create legal issues for your startup.
Par value and your balance sheet
From an accounting perspective, par value influences the equity section of your balance sheet. Here’s how:
- Stock issuance. When your company raises funding by selling shares, the balance sheet must reflect the incoming cash (an asset) and the corresponding increase in equity.
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Equity breakdown. This is how your the equity section of your balance sheet is calculated.
- Par value. Recorded as the nominal value per share multiplied by the number of shares issued.
- Additional paid-in capital (APIC). The remaining equity after accounting for par value.
How par value works when you issue shares
Let’s say your startup issues 1 million shares at $10 per share, with a par value of $0.0001 per share. Here’s how it the calculations work
- Par value: 1 million shares × $0.0001 = $100
- APIC: ($10 – $0.0001) × 1 million shares = $9,999,900
- Total equity increase: $10,000,000
On your balance sheet, the corresponding $10 million cash inflow offsets this equity increase.
Par value and Delaware franchise taxes
For Delaware-incorporated startups, par value can influence your annual franchise tax calculation. Delaware offers two methods for calculating this tax:
- Authorized Shares Method
- Par Value Method
If you’re a small startup and receive a surprisingly high tax bill, you might be using the wrong method. Switching to the par value method often lowers the tax significantly. This is an area where working with an experienced accountant can save your company money.
Setting the right par value
The good news? You don’t have to figure this out on your own. Your attorney will typically select an appropriate par value when incorporating your business. Most startups set it extremely low, such as $0.0001 or $0.00001, to simplify accounting and reduce potential franchise taxes.
Key takeaways for startup founders
Now that you understand par value, there are some points you need to remember when you’re launching your startup.
- Work with an experienced attorney. Setting the right par value during incorporation and fundraising will help you avoid legal complications.
- Get the accounting right. Par value and APIC need to be accurately recorded on your balance sheet to present a comprehensive financial picture to your investors, so work with an experienced accountant to make sure your numbers are right.
- Optimize your franchise taxes. If your Delaware franchise tax bill seems excessive, consult an accountant to make sure you’re using the best calculation method.
At Kruze Consulting, we help startups with all aspects of accounting, taxes, and financial strategy. If you have questions about par value or other accounting topics, contact us. You can also follow us on YouTube, LinkedIn, and our blog for information about accounting, finance, HR, and taxes for startups!
