how to assign stock to founders

Mechanically, the way to do this is to document the founder stock issuance with a restricted stock purchase agreement issuing the shares to the founder with vesting, and then have the purchase price paid with a technology assignment agreement in which the founder assigns her or his IP to the company in exchange for the shares.

Full Answer

Do founders have a plan for stock allocation?

So now the founders have a plan for stock allocation from the beginning. This technique is far from precise, but it can be a reasonable technique for starting out. And don’t forget about vesting, in case things don’t work out with one of the players.

How to issue stock to the founder of a startup?

Mechanically, the way to do this is to document the founder stock issuance with a restricted stock purchase agreement issuing the shares to the founder with vesting, and then have the purchase price paid with a technology assignment agreement in which the founder assigns her or his IP to the company in exchange for the shares.

How many shares of stock does a Startup Owner get?

When a startup is initially formed, it will usually authorize 10,000,000 shares of common stock. The initial allocation of this equity will be broken down into three groups: Founders will be allocated 8,000,000. These shares will be distributed based on each founder's ownership percentage.

What is founders stock?

Founders stock refers to the shares issued to the originators of a company. Often, the stock does not receive any returns up to the point that a dividend is payable to the common stockholders.

How do you allocate stock to founders?

Investors claim 20-30% of startup shares, while founders should have over 60% in total. You may also leave some available pool (5%), but don't forget to allocate 10% to employees. Based on the most outstanding skills of co-founders, define your roles clearly within the company and assign job titles.

How many shares should be issued to founders?

How many shares do startup founders need to issue? The commonly accepted standard for new companies is 10 million shares.

Do founders get stock options?

In a private company setting, after the founders have been issued fully vested or restricted stock under their stock purchase agreements, the employees, consultants, advisors and directors who are subsequently hired commonly receive equity compensation through stock options.

How do startups typically allocate shares at formation?

One common use of unissued shares is to reserve additional shares to the company stock plan that is used to issue equity to employees, consultants, advisors and directors. Some startups may also use unissued shares to issue equity to an accelerator program that accepts common stock (e.g., Y Combinator).

How do you divide equity between co-founders?

Splitting equity among co-founders fairlyRule 1: Aim to split as equally and fairly as possible;Rule 2: Don't take on more than 2 co-founders;Rule 3: Your co-founders should complement your competencies, not copy them;Rule 4: Use vesting. ... Rule 5: Keep 10% of the company for the most important employees;More items...•

What percent do founders own?

The bottom line is that instead of owning 75% of the company, the founders will end up owning 60% of the company, and the investors 25%. For the founders, the $1.3 million financing was not 25% dilutive but 40% dilutive....Option pool.Series AFounders60%Series A investors25%Employee option pool15%Total100%Mar 4, 2016

Do founders get preferred or common stock?

Founders don't get preferred stock. But it's nearly impossible to raise venture capital without issuing preferred stock, or preferred shares. In most cases, VCs today won't hand over a dime in exchange for common shares, the form of equity extended to founders and employees.

Do founders need a stock purchase agreement?

A founder stock purchase agreement is an agreement that documents ownership of a company in its beginning stages. This legal contract is not mandatory but is beneficial to establish a shareholder's stake in the company and determine the terms and conditions of that ownership.

Do founders pay taxes on stock?

Founders of a start-up usually take common stock as a large portion of their compensation for current and future labor efforts. By electing to pay a nominal amount of ordinary income tax on the speculative value of the stock when it is received, founders pay tax on any appreciation at the long-term capital gains rate.

What is typical CEO equity in startup?

Startup financial advisor David Ehrenberg suggests that 5 to 10 percent is a fair equity stake for CEOs who join the company later. Research by SaaStr backs up this suggestion. The average founder/CEO holds roughly 14 percent equity at the company's IPO, while an outside CEO holds an average of 6 to 8 percent.

What is the minimum percentage of share to control a company?

50%50% This percentage is most often regarded as being key for 'control'.

How many shares of stock does a founder have?

Typical Startup Stock Allocation. When a startup is initially formed, it will usually authorize 10,000,000 shares of common stock. The initial allocation of this equity will be broken down into three groups: Founders will be allocated 8,000,000.

Not Just a Question for Founders

One question I get asked all the time by a team founding a startup is how to allocate stock among the two or three initial founders. Often the question is expanded to cover other “founders” who are not prepared to join the team until some milestone is met.

Carefully Consider the Near-and Long-Term Roles of Early Team Members

For key founders, I like to talk about their ultimate roles in the company. Quite often, the individual team members have a pretty good idea as to what their roles will be in the early years. For example, one team member may be likely to be the CEO, and one might be the CTO or possibly VP Engineering or Head of Creative.

Why do founders get a large share of the stock?

Founders are allocated a large portion of the company’s stock due to their contributions to the company and as an incentive to continue service to the company. However, the founders’ percentage of ownership will change over time depending on the number of employees, rounds of investment, and general company growth.

What do founders focus on when starting a company?

When starting a company, founders often focus exclusively on making sure that products can be developed, that customers or clients can be found, and that the company generally has a strong growth trajectory. Other areas may be harder to focus on when the company is in its infancy — but they are no less important.

Why is it important to allocate shares among founders?

Allocating shares among founders at the outset of the company is extremely important. Unlike the allocation of stock relative to investors and employees, the ratio of stock allocated among founders will likely not change as the company grows, unless there is an agreed upon change or a founder leaves the company.

What does "allocated to founders" mean?

Allocating to founders refers to how much stock should go to the founders of the company relative to the total amount of stock outstanding. Allocating among founders assumes that more than one individual can be considered a “founder” and refers to how those founders should allocate the stock among themselves.

What factors should be considered when deciding what to allocate shares to a company?

These factors include: Who had the idea and/or is contributing patented technology. Who is formulating and executing the business plan.

Is the allocation to founders higher or lower?

Depending on the specifics of the company, the founders, the employees, and the investors, the allocation to the founders may be higher or lower. However, these numbers are a good place to start when thinking about how to allocate shares to founders. Founders can iron out the details using a simple pro forma cap table to see how changes in ...

Is founder stock based on sweat equity?

Allocating founder stock based on actual work contribution (“sweat equity”) and treating the founder who contributed capital as an investor, with shares being issued to them from those shares allocated for investors, is often a better arrangement.

Why do founders stock vest?

A vesting schedule is vital because it helps protect founders from the free rider problem if one of them decides to leave. It also protects the founders’ equity when other investors come into the equation.

Why do founders need vesting schedules?

But why would an individual consider a vesting schedule for their founders stock? Two reasons: one, if one of the early founders chooses to leave or is asked to leave when the company is still young , a vesting schedule helps to protect the other founders from the “free rider”.

What is preferred stock?

Preferred Shares Preferred shares (preferred stock, preference shares) are the class of stock ownership in a corporation that has a priority claim on the company’s assets over common stock shares. The shares are more senior than common stock but are more junior relative to debt, such as bonds. Restricted Stock.

Is founder stock legal?

Founders stock is not a legal term per se. It’s simply a term used to describe the shares. issued to the early investors or participants in a company. They could be investors or any other individual who helped transform the idea of a company into reality. Consequently, a firm’s bylaws may not even include the term.

What to do once you have set the roles of each founder?

Once you have set the roles of each founder, it is time for you to figure out the shares you will be offering to the contractors, consultants, and advisors at the early stages. And discussing the percentage you are supposed to offer them is not easy during the initial days.

What can a founder contribute to a company?

A founder can contribute different things to the company which includes: ongoing work, business expertise, capital, patents, or the business idea. Understand the nature of the contribution and find its value to distribute the shares based on it. For a person who adds in capital to the business, you can consider giving them more shares as compared to the others. On the other hand, you can also distribute equity based on the level of work contributed by each of the founders.

Who gets the most stake in a company?

Normally people who have an important role in the company get the most stake over others. This means that a CEO or CTO would get a higher stake as compared to an officer. So for considering the share of equity amongst the co-founders, you can think of their anticipated role in the company on the basis of their degree of skill, the company’s requirements and their capability.

Is a C corporation stock purchase taxable?

So long as the purchase price that a founder pays for her or his shares of stock in a C Corporation is equal to the fair market value of the shares at the time of the purchase, then the purchase will generally not be a taxable event for the founder.

Is the default rule for shares in a startup taxed?

In a startup, everyone expects the value of the shares to increase significantly, so under the default rule you’ll be taxed when the shares are worth much more than they were when you paid for it.

How to calculate founder's value?

When calculating a founder's value, you can divide it into five categories: idea, commitment and risk, business plan development, domain expertise, and responsibilities. You can assign a value between 0 and 10, and then multiply by the founder's score in order to determine a weighted score.

How many shares of common stock do startups have?

In general, startups typically authorize 10,000,000 shares of common stock. This amount is easily divisible and will enable you to distribute round numbers of shares. It's also common practice. How you determine the allocation of equity will depend on many different factors. During your company's early stages, you won't have enough information ...

How long does a stockholder's equity vest?

According to a four-year vesting schedule, each stockholder's equity will vest equally in 48 phases: once a month for four years.

How long does Evergreen stock last?

As a result, employers are often granting "Evergreen" stock options, which are additional stock grants that typically activate after two and a half years. This avoids the situation in which employees no longer vest any equity after four years (or the company's vesting schedule).

What are the three groups of vesting?

The first step, dividing within the organization, is the most important. The total amount (100 percent) must be divided into three main groups: founders, investors, and option pool. The standard distribution of equity to each of these groups is listed below.

What is vesting schedule?

Vesting schedules determine when an individual may exercise his or her stock options. Schedules are time-based, and will vary according to your startup. The most common vesting provisions usually include:

Why are stock options good for employees?

Stocks are relatively low-risk for employees. “Stock options are great because employees participate in the upside without taking on any downside risk ,” James Seely, head of Marketing at the ownership management platform Carta tells Startups.co.

How long should stock options be covered?

Experts recommend that this gap be covered for generally around two years — but each company’s mileage may vary.

What are the disadvantages of stock options?

Stocks are really tricky. “The first disadvantage of stock options is that they are complicated and most employees require a base level of education to understand them,” James says. “Many of the companies we work with at Carta invest in educating new hires and periodically host training sessions for existing employees.”.

What is cliff vesting?

Cliff: “ Cliff vesting is the process by which employees earn the right to receive full benefits from their company’s qualified retirement plan account at a specified date, rather than becoming vested gradually over a period of time.”.

What does it mean to be a partial owner of a stock?

A stock is a portion of ownership in a company and, for some people, being a partial owner is a great motivator for working even harder. People feel a greater sense of investment and pride in anything — a house, a business, a car — when they own it.

What is restricted stock?

Restricted Stock: “shares in a company issued to employees as part of their pay, but which cannot be fully transferred to them until certain conditions have been met.”. Shares: “a part or portion of a larger amount that is divided among a number of people, or to which a number of people contribute.”. Stock Options: “a benefit in the form of an ...

Can stocks make up a gap?

Stocks can make up a gap between salary and market rate. Startups can offer a lot to employees. The chance to work on something new and exciting. More flexibility in the workplace. “Casual Friday” every day. But one thing many startups can’t offer is a salary that meets market rate.

Not Just A Question For Founders

Carefully Consider The Near-And Long-Term Roles of Early Team Members

• For key founders, I like to talk about their ultimate roles in the company. Quite often, the individual team members have a pretty good idea as to what their roles will be in the early years. For example, one team member may be likely to be the CEO, and one might be the CTO or possibly VP Engineering or Head of Creative. In other teams, however, a ...

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