Key Takeaways

  • Share allocation depends on founder roles, timing, and future company value.
  • Most startups authorize 10 million common shares at formation.
  • Reserved shares are often set aside for co-founders, advisors, or stock option plans.
  • A vesting schedule with a one-year cliff is common for founder shares.
  • Documentation is critical—stock issuances should be recorded in board consents and stock purchase agreements.
  • The issuance of shares must comply with corporate and securities laws.

How to issue stock to founders largely depends on the company which you are running. For example, if certain founders are waiting until a certain milestone occurs to join your business, you will need to set aside stock for these founders until they actually become a part of the company.

Allocating Stock to Founders

One of the biggest questions people have when forming a startup is what's the best way to allocate the stock to initial company founders. This issue can become even more complicated if all of the planned founders have not yet joined the business. For example, one member on your team may be delaying joining your company until you have acquired financing.

Deciding how to allocate stock at a company's founding can be especially difficult, as it's hard to tell just how valuable the company will be in the future and how each founder will contribute to that future value. Basically, you don't want to give too much of your stock away without knowing what you will receive in return.

When trying to decide how to issue stock to founders, the best place to start is by considering each founder's short- and long-term roles. Some of your founders, for instance, may wind up taking important company positions such as CEO or CTO, while other founders may only be actively involved at the start of the business and will be hands-off later on.

Your founders should meet and discuss what their relative stock ownership will be. In addition to helping you decide how to issue stock, this will also define each founder's ongoing role in the company. While discussing how your company's equity will be split, there are several founders to consider:

  • The expectations of each founder.
  • If the equity split will continue to work after securing initial funding.
  • If the split is likely to require a reallocation later on.

Factors to Consider When Allocating Founder Shares

When deciding how to issue shares in a startup, several critical factors must be weighed beyond role expectations:

  • Relative Contributions: Consider not only initial efforts but future value creation, such as product development, fundraising, or business strategy.
  • Risk Tolerance: Founders who take on more personal or financial risk may merit a larger share.
  • Time Commitment: Full-time founders typically receive a larger allocation than part-time or advisory-level contributors.
  • Founder's Timeline: If some founders are joining later, issue their shares at that time rather than upfront, or allocate shares conditionally.
  • Dilution Awareness: Ensure founders understand how future equity rounds will affect ownership.

Founders should strive for transparency during these discussions and document agreements to avoid disputes later.

Founder Vesting Schedules

To protect the company if a founder leaves early, most startups use a vesting schedule for founder shares. This ensures that equity is earned over time:

  • Typical Vesting Terms: 4-year vesting with a 1-year cliff is standard. After the first year, 25% of the shares vest, and the rest vests monthly or quarterly over the next 3 years.
  • Acceleration Clauses: In some cases, founders may negotiate acceleration clauses—such as single-trigger or double-trigger acceleration—for events like acquisition or termination without cause.
  • Custom Schedules: Vesting terms can be tailored, but should reflect each founder's expected contribution timeline.

Vesting helps align incentives and demonstrates to investors that the team is committed long-term.

Typical Startup Stock Allocation

When a startup is initially formed, it will usually authorize 10,000,000 shares of common stock. The initial allocation of this equity will be broken down into three groups:

  • Founders will be allocated 8,000,000. These shares will be distributed based on each founder's ownership percentage.
  • The company's stock plan will receive 1,000,000 shares.
  • 1,000,000 shares will be left unissued for use in the future.

In some cases, startups will recruit co-founders at a later time. If your company plans to recruit co-founders, you can decrease the amount of shares issued to initial founders and increase the amount of unissued shares. Imagine that you are the sole initial startup founder and that you're interested in finding a co-founder after starting your company. Instead of issuing yourself the 8,000,000 mentioned previously, you should issue yourself 6,000,000 shares, reserving 2,000,000 for your future co-founder.

The main reason that you may leave some of your shares unissued is that it can help your company avoid acquiring corporate approvals. Leaving shares unissued also means you may not need to amend your company's formation documents to authorize more shares as your business grows.

You can use your unissued shares for several purposes. For instance, you can add these shares to your company stock plan if the shares reserved for that plan have run out. If you decide to use an accelerator program for your startup, you can issue equity to this program by using your unissued shares. Be careful about how many shares you are leaving unissued, however, as the number of unissued shares a company possesses can have franchise tax implications.

After formation, most startups use a basic structure of capitalization. This means that the startup does not have securities, warrants, or options that can be transformed into stock. As long as the startup maintains this simple capitalization structure, the number of unissued shares should not impact ownership of the company.

For instance, if your startup has two founders, and you allocate each founder 4,000,000 of the 10,000,000 authorized shares, both founders would own 50 percent of the company. This ownership percentage will change once the company issues additional equity. Before issuing further equity, you should consider how issuing this equity will affect the ownership percentage of each founder.

Understanding Share Classes and Legal Structure

While founders typically receive common stock, startups can also authorize preferred stock, especially for investors. Founders should understand these distinctions:

  • Common Stock: Standard for founders and employees; carries voting rights but no liquidation preference.
  • Preferred Stock: Often issued to investors; includes benefits like dividends, liquidation preference, and anti-dilution provisions.
  • Authorized vs. Issued Shares: The certificate of incorporation will list the total authorized shares. Only a portion is issued at formation.

All share classes and rights should be clearly defined in the corporate charter to avoid future legal issues.

Legal Steps to Issue Shares in a Startup

Issuing shares in a startup requires adherence to corporate formalities:

  1. Board Approval: The board of directors must authorize the stock issuance via board consent.
  2. Stock Purchase Agreement (SPA): Founders typically sign an SPA outlining the number of shares, purchase price (often nominal), and any vesting terms.
  3. Consideration: Shares must be issued in exchange for consideration, which may include cash, IP assignment, or services.
  4. Cap Table Updates: Accurately record all issuances and transfers in your capitalization table.
  5. Form 83(b) Election: If shares are subject to vesting, founders should file an 83(b) election with the IRS within 30 days to avoid unfavorable tax treatment.
  6. Compliance with Securities Laws: Even private startup equity is subject to securities regulations. Most startups rely on Regulation D exemptions, but legal advice is essential.

These steps help ensure that your company stays compliant and avoids future legal disputes.

Using Equity for Future Hires and Advisors

Reserving equity for key hires and advisors is a strategic way to attract talent:

  • Stock Option Plan (ESOP): Many startups allocate 10–20% of total shares to an option pool for future employees.
  • Advisors and Consultants: Consider setting aside a small percentage (typically 0.25%–2% per advisor) for experienced advisors.
  • Unissued Shares: These can be used flexibly for issuing new stock without needing to amend the certificate of incorporation immediately.

Proper planning ensures that future growth and hiring efforts are supported by an appropriate equity structure.

When to Seek Legal Guidance

While founders can often manage early-stage share allocations themselves, professional legal assistance is strongly recommended when:

  • Your company is incorporating or setting up a stock plan.
  • You have multiple founders and need customized agreements.
  • You’re preparing to raise funding and need a clean cap table.
  • You’re issuing shares subject to vesting and 83(b) considerations.

An attorney can ensure compliance with corporate and securities laws, draft critical documents like SPAs and board consents, and help avoid costly mistakes. You can find experienced startup attorneys on UpCounsel to assist with this process.

Frequently Asked Questions

How many shares should a startup issue at formation? Most startups authorize 10 million shares of common stock at incorporation to allow for flexibility in future allocations.

What is a standard founder vesting schedule? A typical schedule is four years with a one-year cliff, meaning no shares vest until the first anniversary, followed by monthly or quarterly vesting.

Do founders need to pay for their shares? Yes, shares must be issued in exchange for some form of consideration—usually a nominal cash amount or assignment of IP or services.

What documents are needed to issue founder shares? You’ll need a board consent, stock purchase agreement, and possibly IP assignment agreements. You should also update your cap table accordingly.

What is an 83(b) election and why does it matter? An 83(b) election informs the IRS that the founder wishes to be taxed on the fair market value of restricted shares at the time of issuance, helping avoid higher taxes later if the stock appreciates.

If you need help with how to issue stock to founders, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.