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New founders frequently ask our startup lawyers:
How many shares should I issue myself and my co-founders when I first incorporate my company?
Startups will approach this question differently. Some will choose to divide shares equally among co-founders and others may allocate shares based on the percentage of your startup they want to ‘own’. We unpack two approaches below.
Dividing Shares Equally Among Co-founders
The more straightforward approach is to distribute the number of shares equally among co-founders. For example, if you have 300 shares and three co-founders, each would receive 100 shares. Or, you can distribute shares based on what each co-founder will contribute, for example, 200 | 50 | 50.
When determining this figure, you should remember two points:
- all shares that your startup will issue to shareholders must be whole numbers (i.e. you cannot issue 1.5 shares to a co-founder); and
- you will need to set a price per share, and should pay this upfront (which can be a nominal number, like $0.01 per share).
The price per share reflects the value of the company. So, if you issued yourself 1,000,000 shares at $1 per share (valuing your new startup at $1 million), you would either have to pay $1,000,000 to the company or inform ASIC that the shares are partly paid. A partly paid share means that the shareholder has paid part of the issue price upfront (for instance, $0.50, rather than $1) and will pay the remaining amount in the future.
It’s important that the share price reflects the true value of the company. In our experience, most companies are valued around $1 when they are first set up, but their value can grow quickly in a short period. If you value your company much higher and you cannot pay for your shares in full, you become personally liable to pay the remaining price of the shares at the company’s request. For instance, if a company cannot pay its debts and money is owed to suppliers. A standard approach for a new company with a nominal value is to issue 100 shares at $0.01.
If you are unsure of the appropriate share price for your new company, you should speak to your accountant or tax advisor.
But, if your startup is likely to have additional shareholders, such as investors, you may consider issuing shares based on a percentage.
Dividing Shares Based on Ownership Percentage
When a startup wants to issue new shares to another person, such as an investor, it looks at the number of shares the company has already issued and then issues additional shares that gives the shareholder the desired percentage of ownership. For example, if the company has issued 300 shares and they want to bring on another shareholder who owns 20% of the company, they will issue the new shareholder 75 shares.
A * (B/(1-B)) = Newly Issued Shares
- A is the number of shares the company has already issued (in our example, 300); and
- B is the % of the company the new investor wants to own (in our example, 20%).
The smaller the number of shares on issue, the harder it is to come to a whole share number. For example, if the company only has 30 shares on issue, they would not be able to issue a new shareholder with 20% as the shares required would be 7.5.
Some startups choose to issue a larger number of shares to give the company flexibility with future share issuances (for example, 10,000 shares at $0.01). However, this does mean that your startup will have to pay $100 for the shares. If this is not yet possible but you anticipate issuing more shares to either future hires, or to raise capital from investors, you can increase the number of shares on issue through a share split. For instance, if you only issued three shares when you set up your company, you can ‘split’ the three shares into the number of shares that you need to issue the incoming shareholder with the desired percentage.
A share split typically requires company approvals, an ASIC form and new share certificates. Your accountant or lawyers can assist you with preparing these documents.
The LegalVision Startup Manual provides guidance on a number of common challenges faced by startup founders including structuring, raising capital, building a team, dealing with customers and suppliers, and protecting intellectual property.
The guide includes 10 case studies featuring Australia’s top VC fund partners and leading Australian startups.
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Whether you are a sole startup founder or intend to bring on board multiple shareholders like co-founders, employees or investors, it’s important to consider how many shares you will issue before setting up your company. Although you can change your company’s share structure down the track, this can have tax consequences or be an administrative headache. If you have any questions or would like assistance setting up your company and issuing new shares, get in touch with LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.
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