Setting up your company shares structure
If you are just in the beginning of a company formation and planning on distributing shares among shareholders, you should have a strategy and get every preparitorial aspect in line.
You should definitely pass a Resolution of Directors on issuing uncertified shares. I’m a big fan of this. You do not need to keep paper (physical) shares and can issue electronic shares.
If you set up a company, you need to decide what would be the value of your shares. Par Value is not a market price or accounting price as you have not yet started the business; therefore you need to set a value of the shares before you issue them. Par Value is the lowest amount for which a share of stock can be sold by the company. Most entrepreneurs keep the value of the share as low as possible in order not to pay high taxes. We recommend keeping the Par Value as low as $.0001, in this way you can pay far less for Franchise Tax. If you decide to have higher Par Value, your future employees will have to pay more for the shares. There is no reason to have higher Par Value share as this is the beginning and you try to minimize any financial burdens.
Many of our startups set up the price as low as $.0001. If you decide to set up an Incentive Plan for your employees, you will have to set up the share price prior to incorporation.
10,000,000 Authorized Shares is the number for any startup planning on raising money from investors or having an Incentive plan for employees.
Before we start going deeper into this subject, please remember that the Franchise Tax might be one of the biggest surprises if you set up your Par Value high and multiply it by the authorized shares, this might trigger a higher Franchise Fax to be paid to the State of Delaware.
First of all, what are Authorized Shares? Authorized Shares are total shares which have been approved by the founder(s) prior to incorporating a company. It’s like approving a budget for how much money you can spend on a particular project. Once you have that number, you know how many shares you have that can be distributed among founders, employees, third parties (lawyers, advisors, consultants, accountants, etc.) or investors. You can also keep all shares for yourself; however, this is not the classical founding model here in Silicon Valley.
From the technical point of view, before you set up your company, you need to know the number of shares you will authorize. This is a must. The Shareholders Resolution will stipulate how many shares are going to be authorized. Once you authorize any shares, that is your company stock of shares. If you have authorized 10,000,000 shares, you can issue them to yourself, employees, third-parties or investors.
Now, you can issue shares and prepare Classes Of Shares
So how do you calculate the percentage of shareholders? If you authorize shares, it doesn’t mean that you have allotted them. You calculate the share percentage just on the basis of issued shares.
You have authorized 10,000,000 shares
You issue 5,000,000 shares which are regarded as 100% of the all issued shares, and 2 founders keep 60% of shares in the company (3,000,000 I&II Founder Shares / 5,000,000 total issued shares)
- 1,500,000 shares to I Founder (30% ownership)
- 1,500,000 shares to II Founder (30% ownership)
- 500,000 shares issued to employees (10% ownership)
- 1,500,000 shares issued to Investor (30% ownership)
You can issue more shares; however, please be reminded that you might end up paying a higher Franchise Tax. In the case of the Delaware company, you need to keep in mind how that will affect your tax bill. You can check this out on the website of State of – the Delaware Franchise Tax Calculator.
What happens with Unissued Shares? Well, there is nothing wrong if you don’t use up all company shares, you can keep them for future employees or investors. You are not required to issue all of them. Authorized Shares don’t vanish or expire.
Class of Shares
As you have authorized shares, you know that 3,000,000 shares are already issued to investors. However, you will need to also issue shares for your employees.
It is like filling out a basket with Eggs: You need to understand the size of the basket. If you authorize 10,000,000 shares, you should be able to reserve 1,500,000 shares for your employees. You might also give a name to these shares such as “Stars Program.” So now you know that 1,500,000 shares are untouchable, waiting for the employees.
Here is a perfect example, Employees Incentive Plan.
This is the most important part of any Tech-Startup. As there is a lack of capital in any startup, you might be offering equity to the employees in the form of bonuses or employees compensation. We call it Employees Incentive Plan. Every company understands the attraction of top talent, and this might be the way of how you can attract top people for your company and compensate them while at the same time bootstrapping.
If you raise any funds, you might call that class of shares the Seed Round. A Round is mostly referred to as Venture Capital Investment Class Of Shares.
You might also think of naming another class of shares, third-party providers “Rewards.” If you are running a low-cost startup, some of the third party providers might accept compensation in equity. Lawyers or any Consultants might accept company equity as part of their pay and work with you in this way.