Quantcast
AlleyWatch Daily Pulse Email   

How Many Shares Should You Issue to Founders?


90 Flares

90 Flares


×

founders

How many shares should the corporation initially issue?  Often times corporations will want to raise money, and corporations and investors like to price the first round of equity financing at $1.00 per share. This may give you some guidance on how many shares to authorize and initially issue. The price per share in an equity financing is calculated as the negotiated pre-money valuation divided by the total number of shares of the corporation outstanding inclusive of the corporation’s Equity Incentive Plan. If you wanted to raise money at a $3,000,000 pre-money valuation, for example, then there would need to be 3,000,000 shares of common stock outstanding (inclusive of the Equity Incentive Plan) at the time of your financing to price the stock at $1.00 per share. This example also may give you guidance as to the number of founders’ shares to issue–you have 3,000,000 shares to divide among the founders and the Equity Incentive Plan.

Next, how will you know how many shares to give to each founder? Generally, the initial equity of the corporation will be divided among the founders based on the skills and contributions made to date and the expected contributions to be made in the future. An excellent tool for gauging the amount of stock a founder should receive is the Co-Founder Equity Calculator by Alain Raynaud, and we recommend you give it a try.

For LLC’s issuing “units” instead of shares, the same concepts above apply.

This article originally appeared on Venture Docs, an online platform for automating the creation of important legal documents for startup companies, investors, crowdfunding portals and attorneys.

Image credit: CC by Giovanni Cioli

Print Friendly

About the author: Bo Sartain

Bo is a practicing corporate attorney with the law firm of Haynes and Boone, LLP.  Bo’s legal practice focuses on the representation of investors and issuers in company formation, private equity and venture capital preferred stock and preferred LLC membership interest equity financings, and the representation of buyers and sellers in mergers and acquisitions. Formerly, Bo was a Systems Engineer and the founder and CEO of a startup software-as-a-service company.

  • Sam Iam

    OK this is nice, but the article speaks of shares issued “at the time of financing”; meantime, aren’t shares issued at the time the company is formed? On day one how many shares, and what % of the company, should be allocated to the founders? It could be many many months before financing is obtained. What are the risks of issuing too many or too few shares to the founders on day one (n terms of tax, valuation, etc), and what is the impact on (possibly distant) conversations with investors later?

90 Flares Twitter 68 Facebook 0 Google+ 2 LinkedIn 20 Pin It Share 0 Email -- 90 Flares ×

You are seconds away from signing up for the hottest list in Silicon Alley!

Don't miss any of the stories shaping entrepreneurship. Sign up today.

Follow Us on Twitter
Follow @alleywatch
CLOSE