How many shares startups should issue to the founders is normally a function of the pre-money valuation the company hopes to get in its first equity round.
When setting up a new corporation, the founders normally receive restricted stock called “founders stock” (see related blog post What is Founders Stock, Legally?), which means share of common stock that are subject to a vesting schedule (see related blog post Vesting of Shares).
Determining How Many Shares of Founders Stock to Issue
How many shares should the corporation initially issue to the founders? 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 to the founders.
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. If you wanted to have 20% allocated to the corporation’s Equity Incentive Plan, this would leave 2,400,000 shares to divide among the founders.
Determining How to Divide the Founders Stock Among the Founders
Next, how will you know how to divide the shares among the founders? 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. Basically, the inputs (time, effort, skills that the founder brings to the table) need to match the outputs (how many founders shares a person receives).
For LLC’s issuing “units” instead of shares to the founders, the same concepts above apply.
Where to Get Legal Documents for Founders Stock
When setting up a new corporation, our Premium Incorporation Legal Documents Package contains the Restricted Stock Purchase Agreements for issuing founders stock to the founders, complete with vesting provisions and 83(b) tax election forms.