How Many Shares Should Founders Get? Shares Explained
As a startup founder, one of the most important decisions you’ll make is how to divide up your company’s equity among its founders. How many shares should founders get? That depends on a number of factors, but there are some general guidelines you can follow.
One approach to dividing up shares among founders is to give each person an equal number of shares. This can help ensure that everyone has an equal say in the company’s direction and provides motivation for all to work hard.
Before deciding how many shares should founders get, the team needs to discuss the difference between authorized shares, issued shares, and outstanding shares.
Issued shares vs. Authorized shares vs. outstanding shares
the number of authorized shares refers to the maximum number of shares that a corporation can legally issue to its investors and stockholders. When a corporation is formed, the founders are required to submit a certificate of incorporation, also called the charter, to the Secretary of State. The charter includes the maximum number of shares that the corporation is authorized to distribute or issue.
issued shares are the number of authorized shares that the corporation has actually issued to all its stockholders. The number of issued shares cannot be greater than the number of authorized shares.
Outstanding shares are issued shares that are currently outstanding. A corporation can buy back shares after they have been issued.
Authorized shares are the company limit
The authorized share limit is similar to a credit limit for a credit card. Let’s suppose you have a $5,000 credit limit, and ABC Corporation has only 5,000 shares authorized. The $5,000 credit limit is equivalent to the number of authorized shares. ABC Corporation cannot sell or grant more shares the way you cannot spend more than your credit limit.
let’s say ABC Corporation issues 2,600 shares starting with its 5,000 authorized shares. This is equivalent to the company spending $2,600 of its $5,000 “credit limit”. ABC Corporation has 2,400 shares remaining to issue.
Additional shares cannot be issued if there are not enough authorized shares. You must amend the corporation’s charter to allow you to issue additional shares after you have reached the authorized limit. This usually requires approval by the board of directors and at most a majority (or whatever approval process is stated in the charter).
Stockholders may not approve of this change, as increasing the authorized shares allows for the possibility of issuing more shares that could dilute the stockholders’ ownership.
How many shares should founders get?
The standard for new companies is 10 million shares. Venture-backed startups that are able to scale will require you to issue shares to a growing number of employees.
Authorizing 10 million shares makes it unlikely that you will ever need to offer a fraction of a share to anyone. An employee can be granted 10,000 shares by a company, which is 0.1% of 10 million shares. Psychologically, this is better than giving ten shares, which would be 0.1% for 1,000 shares.
the price per share will be lower if a company has authorized and issued more shares. For example, if two companies are each worth $1 million, and one company has authorized and issued 10 million shares while another has only authorized and issued 1,000 shares. The first company would have a price per share of 10 cents while the second company’s price per share would be $1,000. As an investor, it can feel better to buy at a lower price.
Assuming that a company has 10 million authorized shares, founders are typically issued anywhere from 5 to 7 million shares. This ensures that the founders always own a majority of the issued shares, even when all 10 million shares have been allocated.
To incentivize employees, startup founders set aside a percentage of the company to issue employees stock options or other equity incentives. This reserved number of shares is called the “option pool” and is most commonly the number equal to 10 to 20% of the currently issued shares.
Investors can buy more shares of a company’s stock, beyond the number of shares that have already been issued. These additional shares are usually preferred stock.
How to calculate ownership percentage?
If a startup has 10 million shares authorized, 6 million shares are divided equally between the founders. Each founder will own 3 million shares or 50% of the company. 600,000 shares can be reserved by the founders for stock options \(or other equity incentives) if they wish to create a 10% option pool.
Stock options grant the right to purchase shares, but they are not shares of stock. A stock option holder does not own any shares of the company until the stock option has been exercised.
How many shares should founders get? Authorizing a large number of shares may be confusing to investors who are used to seeing only 10 million, but it is important to have enough shares available in order to issue additional ones as needed for employee incentives or future fundraising efforts without having to amend your charter each time.