Pre-Discovery and Discovery

Pre-Discovery
Every discovery of minerals does not only require money, but a lot of dedicated effort from many different sources. Many discoveries are what result from the efforts of prospectors who are financed by a grubstake. This is a business association which is informal between friends or associates who put up seed money to do some initial work with the intention of participating in the benefits. That is to say, the prospector's work may be financed by a friend in exchange for an interest in whatever he or she may find.

Discovery
Assuming that our prospector, Morty, has staked some ground and found a surface mineral showing. Most prospectors or grubstakers can only put together sufficient money for a limited quantity of work on their ground – some sampling or trenching, maybe a few days work with a backhoe, or one of the less expensive geophysical ground surveys like magnetics or VLF-EM. Surpassing this point, they have the choice of forming a company to do more work or finding an established company to continue the work from there — and the cost.

Under an option agreement, Morty offers an interest in the property to a company with sufficient funds to do added work. In exchange, the company commits itself to spend a specified quantity on exploration - when it has done that, it has earned its interest.

Most of the time the company taking the option will make a cash payment or issue some of its shares to the holder of a property.

The original holders may be left with a participating or working interest in the property, in which they finance part of the future work, or with a carried interest, which gives them a royalty on future production without the obligation to contribute to future expenses.

The other option for Morty and his grubstakers is to form a company which has limited liability. Their company could then issue a definite number of shares to raise the capital it needs.

In the case of the incorporated company, consideration for the money and effort our grubstakers have put into this discovery will be returned to them in a number of shares agreed upon in the new company — Morty Mines Corp. These shares are called vendor shares and the vendors will not be permitted to turn around and sell them in the market. Instead, they will be held in escrow, usually in the hands of a trust company acting under instruction, until a successful application may be made to the securities commission for their release, to be traded on the stock market. The reason for this will be apparent shortly.