A new entrepreneur recently asked me about how to allocate shares at the company formation stage. I asked around and here are some highlights on what I found:
In talking with my lawyer and some entrepreneurs, you could start with 10MM total but it’s not uncommon to create more upon formation, like 20 or 30MM. The reason for doing this is to not have to file additional paperwork (and incur legal fees) in creating more shares when you need them.
Also, you don’t usually allocate the whole bunch of shares at the outset. Note that the existence of shares does not mean ownership, but only those you allocate. So if you have 3 founders and each has 1MM shares out of a total pool of unallocated 30MM shares, you have officially created 3MM shares but still hold 27MM in reserve. Thus, the 3 people officially own the company at 33% a piece; the additional 27MM does not come into play until they get allocated.
As for allocating a bunch for additional employees, people have allocated about 10-20% of the total for employees and the options pool. As for sheer number, that could be upwards of 4MM set aside for employees, advisors, and board of directors, which is pretty large for an early stage company.
So if you go with 10MM total shares and you want 20% of total for the options/employee pool and let’s say you have 2 founders who want to own the company at 50/50, then you would have 10 MM shares allocated, 4 MM goes to both founders for 50/50 ownership split at 8MM shares total, and then the rest at 2MM (20%) reserved for hiring key people.
FYI – advisors jumping in at this stage typically get .1% to 1 or even 2-3% as options depending on their level of involvement.
Early employees coming in really early stage could get multiple-100s of thousands of options, which rachets down dramatically as the product gets built and time goes on. Certainly this balances with whether or not they get market rate salary or not.
Still, the message is “don’t be greedy”. Incent your employees to get the job done and reward them. Don’t try to hold on to too much or else you may run into trouble later. Same goes for the financing stage. Be prepared to give up part of the company for monies received, but don’t try to hold on to too much or else you may never get funded. On the flip side, be realistic and don’t give away the farm, which could land you in trouble the other way.
Allocation of Shares at Company Formation
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