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.
Image credit: CC by Giovanni Cioli