Reading time: 4 minutes

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:

  1. 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
  2. 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).

Share Price

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.

You can use this formula to help determine the additional number of shares to issue a new investor:

A * (B/(1-B)) = Newly Issued Shares

Where: 
  • 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%).
So, 300 * (0.2 / ((1-0.2)) = 75 shares.

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.

Key Takeaways

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.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Madeleine-Hunt
Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards