Considerations When Allocating Stock To Founders – Corporate/Commercial Law

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Considerations When Allocating Shares To Founders

November 09, 2021

Foley & Lardner

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There are tons of things to consider when getting your startup off the ground, and one that many don’t consider early on is the allocation of shares to founders. This is a critical step to consider very early on in starting your business.

When starting a business, a certain number of common shares are approved. Founders need to decide how many of these shares to allocate to themselves and how to distribute those shares fairly.

Founders typically get a large stake in stocks because they play a significant role in starting and running the business. This number usually makes up around 80-90% of the total shares outstanding.

If there are several founders, they must decide on the allocation of these shares to the founders. Shares can be divided equally among the founders; however, this can sometimes lead to problems later and later reassignment as roles and contribution levels change.

In order to better divide the inventory right from the start, various considerations should be made.

1. How high is the risk that the founder takes? The level of risk is one of the most important points to consider. If a founder leaves the security of a full-time job to work exclusively on the startup, that would be a higher risk than someone who just does it on the side.
2. How much is the founder’s contribution? What role do they play in the company? In addition to the allocation, founders must clarify their roles and the expectations of each person. Someone assuming a CEO role would likely be making a greater contribution on a daily basis than a founder serving in a more advisory or advisory role. Those with a higher level of contribution or a more active role would receive a larger stock allocation.
3. Who developed the idea or the concept? Who Developed Intellectual Property? This is another crucial issue. Founders who were directly involved in the concept development and development of the IP should be rewarded with a larger share of the shares.
4. Who created the business plan? A company’s business plan is a critical part of long-term success and attracting investors. Therefore, looking at the founders creating and refining the business plan will be a big part of the procurement process.
5. Who secured investors? Securing investors is paramount to the success of a startup. When allocating stocks, the role of the founders in establishing connections with investors or actively working to secure investments should also be considered.
6. Stage of development. Founders who joined a company at an earlier stage of development, for example before a prize round, usually receive a larger share of the company’s capital for the time invested and the risk they took while working in a young company.

These are some of the points that should be kept in mind in order to distribute inventory fairly and avoid future disputes. Of course, no one can predict the future, and roles will change over time, as will the level of contribution from the founders. But trying to figure out the allocation from the start based on the information available is an important part of any business start-up. The ultimate goal is to achieve a balanced distribution of equity among the co-founders so that enough remains available to sustain hiring and growth. Be strategic.

Originally published October 14, 2021.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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