What stockholder approval is necessary to complete a preferred stock financing?

Takeaway: A Series A financing requires two key stockholder approvals: a majority vote to amend the corporate charter to create the new preferred stock, and a separate vote to approve the financing agreements themselves, cleansing any potential director conflicts of interest.

While the Board of Directors has the authority to manage the business and negotiate the terms of a financing, they do not have the unilateral power to complete it. A priced equity financing involves making fundamental changes to the company's capital structure and creating a new class of stock with special rights. Under Delaware law, these actions require the formal approval of the company's ultimate owners: the stockholders.

For a Series A financing, there are two distinct and critical stockholder approvals that must be obtained.

1. Approval to Amend the Certificate of Incorporation

• The Requirement: Your company's original Certificate of Incorporation (or "charter") only authorizes the issuance of Common Stock. To sell Series A Preferred Stock to your new investors, you must first legally create that class of stock. This is done by filing an Amended and Restated Certificate of Incorporation with the State of Delaware.

• The Legal Standard: Under Delaware law, amending the charter requires the approval of both the Board of Directors and a majority of the company's outstanding shares of stock. This is the most fundamental approval required for the financing.

2. Approval of the Transaction Agreements

• The Requirement: The second approval is a vote by the stockholders to approve the financing transaction itself and all of the definitive legal agreements (the Stock Purchase Agreement, Investors' Rights Agreement, etc.).

• The Rationale (Cleansing a Conflict of Interest): Why is this second vote necessary? Because the members of your Board of Directors (including you, the founders) are also stockholders whose personal ownership will be diluted by the financing. This creates a potential conflict of interest. By having the stockholders formally vote to approve the transaction, it "cleanses" this potential conflict. It provides powerful evidence that the owners of the company reviewed and blessed the board's decision, which helps protect the board from any future shareholder lawsuits under the "business judgment rule."

The Process: Written Consent

For an early-stage startup with a small number of stockholders (typically just the founders and a few angels), these approvals are almost never done in a formal meeting. They are handled efficiently through a single legal document called an "Action by Written Consent of the Stockholders." Your law firm will prepare this document, which outlines the necessary resolutions, and it will be circulated for signature to all voting stockholders.

Obtaining these stockholder approvals is a mandatory legal step in any priced financing. It provides the clear corporate authority needed to issue the new stock and creates a clean, defensible record that will be scrutinized in all future audits and diligence processes.

Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.