I have an s corp. If I make it so some shares aren't dilutable but others are, does this create a new "class" of shares?

Without doing specific research, I would guess that differing preemptive rights would violate the One Class of Shares rule applicable to S-corps. However, to be sure I would have to do a little research. That said, preemptive rights are typically included with the Articles of Incorporation (or similar document), and applicable to the entire class. Can you just amend the Articles to make the preemptive right applicable to all shares? This seems like an easy solution, that actually benefits you.

In general, creating shares with different economic rights will be considered the creation of a new class of shares for Subchapter S purposes. You should consult with a tax attorney and possibly consider other structures, such as transfer of your shares to the entering shareholder, coupled with a contribution of the sales proceeds to the corporation. While this could have other tax consequences (e.g., realization of gain by you), it could also bolster the argument that you haven't created a second class of stock.

THOUGHTS: 1. The only permitted different classes are voting stock and nonvoting stock. 2. Creative thought. Try a side Agmt among all the shareholders wherein the founders agree to transfer shares in appropriate number to the nondilutable shareholder to preserve him at 10% following the further issuance. Since this is not in your charter docs, it might not cause IRS problems. Check this with a CA corp tax lawyer. 3. Just say no. This could be a dangerous clause if the corp is ultimately successful. Provide for termination at the Board's option after 2 or 3 years.

Good question. Obviously something that wasn't contemplated on the onset but as you grow new issues arise. Quite common in every day business. It's a good problem to have as it means you're adding a person to your team. First, I would advise strongly that you speak with a CALIFORNIA based BUSINESS ATTORNEY. I mean you're in California, you are presumably doing business in California so... yes speak to someone who knows California laws. Second, using Facebook as an example, your partner is wise for not wanting to dilute his shares as you grow. My initial question is why wouldn't you want the same protection? I'm sure there's a good reason.. Doesn't need to be answered. That's for you and your attorney. Third, you can create Bylaws that allow for your shares not to be diluted . However, kind of depends. Sounds like you should probably think ahead and anticipate the potential you might grow again and add more people in the future. Creating a scalable organization structure is important so you don't run into these structural issues in the future. You're small enough to handle this without a big deal. Contact an Attorney local to California for a free consultation. Good luck.