The other day an entrepreneur asked what par value was and why pick such a low number (referring to the $.001 that was proposed). Well this is a dry topic, if ever there was one. It involves a little bit of a history lesson for background, and, as a practical matter, par value of more significance to attorneys than it is to you as an entrepreneur. A couple of clarifications, I am writing about par value of stock and more particularly common stock and even more particularly common stock issued by Delaware corporations. Having said that, here goes:

 At some dim point in the past, long before I started practicing law, par value was the price at which a share of stock was initially sold. It represented the amount of capital that was invested in a corporation in respect of that share. A brief look at Wikipedia suggests that the theory was that investors could be confident that stock would not be sold by the corporation at a lower price. That is right, although I can imagine that par value also served other purposes including assuring third parties that there was some level of capital invested to support the corporation’s activities. 

Stock that is sold by the corporation for less than par value is referred to as "watered stock" because it is not fully paid for. This is a problem for lawyers because they are routinely asked to give legal opinions to the effect that stock is "fully paid and non-assessable,"  which is not true of watered stock.

The requirement that stock not be sold below par value, however, created a problem for modern corporations. Companies want a high degree of flexibility in pricing their stock. The obvious answer to this issue was to have stock with really low par value – hence stock with one penny par value or, as is often the case, less.

A problem which can be of interest to start ups arises with respect to the repurchase of stock by the company and another problem arises with respect to the payment of dividends (which is of less concern to start ups and most tech companies because they typically do not pay dividends). In some cases, having par value will restrict the repurchase of stock and the payment of dividends. The higher the par value, the more likely this is to become a problem.

From the perspective of most of my clients, par value is an atavistic left over of corporate law the effects of which are to be avoided by picking a very low par value.