ec How Many Shares Should Startup Founders Have at Incorporation? Leave a comment

In the example that Spirig gives, the employee is being forced to pay for their equity very quickly, and perhaps years before they might become worth anything at a liquidity event. There’s one stock option term employees should be aware of, Spirig says, which can leave them with few options for turning their equity into cash. To help widen the database, SeedLegals has collated data from Index and Balderton, another London-based VC, to show the typical percentages of equity that employees can expect from early-stage startups .

Authorized unissued shares are shares that have been authorized but not yet issued or otherwise allocated. ☝️ One more question you never have to ask yourself when you use Capbase. We make it easy to divide shares among co-founders, employee stock plans, and investors—and keep track of who owns what. You may believe that the discrete number of authorized shares is less important than the percentage breakdown of ownership stakes. The absolute method is fair if a company is clear about the impact of dilution.

How Many Shares Does a Company Have? Everything You Need to Know

Assuming you can afford the https://personal-accounting.org/ price, the net effect is nearly identical to founder’s stock. If you are joining the company early enough , you may be able to get so-called “founder’s stock” or “restricted stock”. This stock is just common stock, but you purchase it all up front instead of getting an option. The company implements vesting with a buy-back agreement; if you leave before you are fully vested, the company can buy back the unvested portion at the price you paid (i.e. unappreciated). For example, if you left after 2 years on a 4-year vest, the company would buy back 50% of your stock. So far, we’ve talked about the stock as “stock”, but in most cases the company is not going to give you actual stock, but will grant you an option to purchase stock for some fixed price (the “strike price”). To actually own the stock, you have to exercise your option , and write a check to the company for the total strike price.

They’d see something like 10,000 shares from Heap and 15,000 shares from OtherCorp and feel like the Heap offer was lower. We had to coach them on asking the other companies what the denominator of that share count was, looking at price per share, strike price, etc. These concepts might be obvious to people with a background working for tech startups, but to someone coming from outside of tech, it can be pretty confusing. Let’s look at how one sample high-tech startup company that intends to hire employees and raise capital plans to use their 10 million authorized shares. Before we go further, it’s important to get a grasp of the difference between authorized shares, allocated shares, issued shares, and authorized unissued shares. The board gives the CEO a 10% option pool to dole out to employees.

An investor’s shareholder agreement checklist

Please note that stock options give the right to purchase shares of stock but are not actually shares of stock, so a holder of stock options has no ownership in the company until the stock option is exercised. Issuing more shares than there are authorized makes those additional shares voidable. Also known as common stock, they are shares issued to the public or employees. In the charter or article of incorporation created at the point of incorporating the company, the startup states the lowest price per share. It is the price that startup founders buy back their shares after the incorporation. Authorized shares refer to the number of shares a startup company or corporation can distribute to its investors or shareholders at inception.

• For example, if you would have joined Snap in 2017, issued an equity grant of $200K/year at the $20/share part, by 2019 the stock would have been down at $5/share, taking this grant to $50K/year.
• They are usually developed and sold in a priced round to investors.
• The upward march of the shares is the real communication challenge.
• This time period is called the “exercise window”, which refers to the amount of time you have to exercise your options after leaving the company.
• Having millions of issued shares also allows founders to be sensitive to how people perceive the size of their option grants.
• For a high-technology startup, it could be the costs to date of research and development, patent protection, and prototype development.

TopTal never did, and thus the founder still owes 100% of the company stock. Lawsuits are in progress, but employees will likely never see stock. Employees losing big money by exercising options is not a common story, but one that has happened several times – and not just to WeWork early employees.

Valuing Startup Ventures

The fully diluted number too, goes up, over How many shares are in a startup company, as companies raise additional financing rounds, or a board authorizes the issuance of more options. Starting with its 5,000 authorized shares, let’s say ABC Corporation issues 2,600 shares. This is like the company spending $2,600 of its $5,000 “credit limit.” You have $2,400 left to spend in your credit line, and ABC Corporation has 2,400 shares left to issue. The number of authorized shares is much like a credit limit on a credit card. Let’s say you have a $5,000 credit limit and your ABC Corporation only has 5,000 shares authorized. The $5,000 limit is like the number of authorized shares — you cannot spend more than $5,000 credit limit, just like ABC Corporation cannot sell or grant more than 5,000 shares.

If you’re a privately held corporation with no plans to go public, setting the number of authorized shares at one per owner is fine. If you hope to go public at a later date, authorizing a few million shares has its advantages. Having equity in a business essentially means that you own a small portion of that company. It’s typically given out in the form of stock options (we’ll unpack that term later) and, while it might not be worth much when you’re given it, if the company does well you could be in for a chunky payout. Par value is the minimum price per share, as specified on the company’s articles of incorporation. This is the price that founders typically pay for their shares right after incorporating their companies. So you’re ready to incorporate your startup, which means you’re looking to hire engineers, start selling product, and ultimately get investment dollars.