How to Issue Stock to Founders: Everything You Need to Know
How to issue stock to founders largely depends on the company which you are running.3 min read
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.
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.
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.