how to issue stock in a startup

Checklist for Issuing Shares in a Startup

• 1 Board approval and Shareholder approval. The approval of the BOD, as it is important to get the board of directors...
• 2 Review compliance with securities law. Reviewing the Article of Incorporation and following the rules of the...
• 3 Prepare appropriate agreements. The documentation of the sale of stock is important. When...

Full Answer

How to issue stock to founders of a startup?

Typical Startup Stock Allocation How to issue stock to founders largely depends on the company which you are running. For example, if certain founders are waiting until a certain milestone occurs to join your business, you will need to set aside stock for these founders until they actually become a part of the company.

How do you assign Startup stock options?

The other way of assigning startup stock options is “to think of equity in terms of dollar amount,” according to James. “For example, ’I own 2,000 shares in Meetly, and investors paid $50/share in the most recent round of funding, so my equity is worth roughly $100,000 today,’” James says.

How do you issue stock in a corporation?

Issuing Stock Determine how much capital you need. Determine how much stock the corporation is authorized to issue. Set forth the value of the shares that will be issued. Determine the class of the shares to be issued. Determine the number of shares to issue. Make sure you are in compliance with state and federal securities law.

Are stock options a good idea for startups?

“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. “If Mary gets a stock option when the strike price is $1 and the price goes up to $10, she participates in the $9 gain.

What kind of stock would you issue for a startup?

Startup investors typically hold Preferred Stock/Equity, whereas founders generally hold Common Stock/Equity. Employees often hold options that grant them the right to purchase shares of Common Stock/Equity, subject to vesting schedules.

How are shares created in a startup?

Initial equity The founders of a startup generally purchase shares at the time of incorporating the company at a nominal price per share, such as $0.0001 per share, paid in cash, since at that time the company will have no operating history, few assets and thus little value.

How do I issue stock for my company?

To issue stock in a corporation, you can use a simple bill of sale. Stock is issued to fund the corporation—in the Articles of Incorporation, the corporation sets the number of shares the corporation is authorized to issue. The corporation then decides how many shares of stock it will initially issue.

Can a startup issue new shares?

A startup may issue 100 shares or 100 million shares at formation, and 50 shares in the former or 50 million shares in the latter still represents 50% of the equity of the startup. A typical equity pool is between 10% and 20% of the total number of shares issued and reserved for issuance.

How many shares should a startup give you?

As a general rule of thumb, you should consider issuing around 50% of your shares when you are first incorporated. So if you have one partner, and authorize 1,000,000 shares, and issue 50% of them, each of you will have 250,000 shares each.

How many shares do startups usually issue?

The commonly accepted standard for new companies is 10 million shares. When you build a venture-backed startup designed to scale, you will need to issue shares to an increasing number of employees. Authorizing 10 million shares means it will be unlikely you'd ever need to offer someone a fraction of a share.

How many shares does a startup have?

Typically a startup company has 10,000,000 authorized shares of Common Stock, but as the company grows, it may increase the total number of shares as it issues shares to investors and employees.

Can a private company issue stock?

A private company is a firm that is privately owned. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an IPO. The high costs of an IPO is one reason companies choose to stay private.

Do founders have to pay for shares?

And the answer is pretty simple – it's yes. Founders must pay for their own stock under corporate statutes like the Delaware General Corporation Law, Section 152. When a corporation issues stock to a founder, the stock must be what's called “fully paid and non-assessable”.

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?

Understanding a Controlling Interest A controlling interest is, by definition, at least 50% of the outstanding shares of a given company plus one.

How much equity should a coo get in a startup?

between 1 percent and 5 percentThis raises the question: how much should a COO equity grant be? Non-co-founder COOs (i.e. those hired at a later date) typically receive between 1 percent and 5 percent in business equity. Higher equity percentages are usually reserved for COOs who bring a lot to the table.

Why do corporations issue stock?

Corporations issue shares of stock to raise money for their business. The shares that are issued represent the amount of money invested by the shareholders in the company. Shareholders have an ownership stake in the company and enjoy certain rights such as voting rights and the receipt of dividends.

What is the purpose of issuing stock?

Issuing stock is one of the two basic ways to raise funding to grow your business. If your business is new, or is growing, capital is necessary, and issuing stock involves selling pieces of ownership in your business to investors in exchange for cash.

What is a stock subscription agreement?

The stock subscription agreement will outline who you are selling shares to, the amount of shares, the price per share, the date of the transaction, the amount of cash being received, and the payment method. It will also outline all the various risks and responsibilities associated with being a shareholder.

How much would a preferred shareholder receive if there were five preferred shares?

If there are five preferred shares, they would receive their $25 first, after which the common shareholders would be paid. If the profits were $25 , only the preferred shareholders would be compensated. Always consult with an accountant or lawyer to decide on the ideal mix of shares to issue.

How to finance a business?

Other than issuing stock, the other way to finance your business is by relying on debt. Issuing stock has several advantages as an option, and may be appropriate for your business. Firstly, if you are a new business, or a business with a poor credit rating, acquiring debt may be too costly or impractical.

Why do new corporations hold back their shares?

New corporations will likely hold back shares so that, if necessary, it can raise capital at a later date. When you incorporate your business, you will be required to decide how many shares your business is authorized to issue. For example, the initially authorized amount may be 100 shares.

Do you have to print shareholder certificates?

After the agreement is made , you must print out hard copy shareholder certificates to provide your shareholders. This is a legal document that specifies the shareholder's name, the amount of shares held, the value the shares were purchased at, the business name, and any special rights granted to the shareholder.

How to increase stock price?

There are different ways to increase the number of shares, including: 1 A stock payment 2 Exercising a warrant or an option 3 An IPO (initial public offering) 4 Private placement while Issuing Shares 5 Secondary offering

What is the result of issuing new shares?

The result of issuing new shares will be the dilution of existing shareholders ownership, and this needs to be thoroughly reviewed and deemed acceptable before issuing.

What is an authorized share?

Authorized shares refers to the maximum number of shares legally allowed to be issued versus the stock that is authorised in an organization. Out of the authorised shares, issued shares are those that are issued in the market for public trading.

Why do investors get a higher share of equity?

This is because they are the ones with more at stake in the startup. Their contribution is the one that helps kickstart the business.

How long does it take to issue shares of a company?

While you issue shares in your startup, generally within 15 days of the sale of stocks, fillings are required with the SEC (Securities Exchange Commission) or the state administration for securities. So, make sure you do the filing on time.

What are the disadvantages of a new employee with shares?

The two main disadvantages include the complexity that it brings and the high tax that the employee has to pay for getting the shares as compensation. In fact, if you offer a new employee with shares as soon as they join, they might have to pay for it which might not be possible for them due to the lack of cash.

Why is it important to give a share certificate?

The documentation of the sale of stock is important. When common stock is sold to friends and family and the transaction is not negotiated in the appropriate way, it can cause issues for you when you are about to sell the company or wind it up. It is important to give the share certificate or the subscription agreement when giving out stock. This agreement is normally signed by the authority of the company and approved by the board as well. It is also important since it lists all the information about the share you are giving out along with the rights that come with it.

What are the steps to issue stock?

If you are planning to issue stock, there are a number of important steps that should be undertaken, including the following: Board Approval. The Board of Directors of your corporation should approve the offer and sale of the stock, any agreements for the sale, and the filing of any needed government documents.

What do you need to know before selling stock?

Before an offer or sale of stock can take place, you need to ensure that the proper steps have been taken to comply with federal securities laws and the securities laws of the states where the offer or sales of stock are made.

What is shareholder approval?

Shareholder Approval. Approval of the shareholders of the corporation may also be necessary for the offer and sale of shares of stock, particularly if the Articles (or “Certificate” in some states) of Incorporation are being amended in order to approve the issuance of stock.

Do you need a stock certificate after a stock sale?

The corporation should issue a Stock Certificate after the sale of stock. Each certificate must be dated, numbered, and signed by the appropriate officers of the Corporation. It is a good idea to make a copy of each Stock Certificate for the company records. Stock Ledger.

Should a corporation review how the issuance of stock might affect future financings?

Ideally, the issuance of stock should not unduly restrict the ability of the corporation to issue additional stock in the future. Price and Number of Shares.

What is the first step in a stock issue?

The first is to determine the shares to issue. The second is to assess the stock value. Afterward, the company/corporation will need to ensure compliance with state laws. Finally, they will prepare an agreement for their shareholders.

What is stock in business?

Stocks refer to the funds a company raises as capital to begin the operation of its business. Single units of corporate stocks are known as shares. They determine the level of ownership that a shareholder has in the company once issued. People usually purchase these shares in one of two ways.

What happens if you hold common stock for long periods?

If you hold common stock for long periods, you’re likely to earn huge financial rewards. This, of course, depends on the level of new company/corporation growth. However, it’s also worthy of note that common stocks have the greatest risk attached to them and their capital. 2. Preferred stock.

What are the two types of stock?

Types of Stocks. There are two types of stock that you could get in business, which are not exactly on par with each other. They are: 1. Common stock. If you’re new to business terms, you might be tempted to think that this type of stock is another ironically ambiguous name.

How to assess a company's value?

There are several methods you can use to assess your company’s value. One of them is the price to book ratio. This element shows how much you’re worth if you get torn up and sold instantly as a company/corporation. Another method is the price -to-earning ratio.

Do you get voting rights on stock?

You’ll also get voting rights in company decisions, depending on the size of your stock. Apart from these voting rights, you can earn dividends on your stock. These dividends are essentially cash payments that the company makes to stock owners regularly.

Can a company issue shares through an initial public offering?

The second is through private channels. Companies can also issue the shares through an initial public offering. Keep in mind that owning an issued stock/authorized shares doesn’t necessarily mean a person would be legally obligated to the business.

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.”.

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 is strike price?

Strike Price (also known as Exercise Price): “ the fixed price at which the owner of the option can buy or sell”. Vest: “Employees might be given equity in a firm but they must stay with ...

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 ...

Why should entrepreneurs establish reasonable vesting schedules with respect to the stock options issued to employees?

Entrepreneurs should establish reasonable vesting schedules with respect to the stock options issued to employees in order to incentivize the employees to remain with the company and to help grow the business.

What is the purpose of stock options?

Stock options give key employees the opportunity to benefit from the increase in the company’s value by granting them the right to buy shares of common stock at a future point in time at a price (i.e., the “exercise” or “strike” price) generally equal to the fair market value of such shares at the time of the grant.

How to issue shares in a company?

How to issue shares in a company? The first step in issuing shares is to examine the certificate of incorporation or articles of incorporation to determine the maximum number of shares that may be issued. A corporation may not issue any more shares than have been previously authorized.

What is capital stock?

Capital stock is listed on a company's balance sheet and includes the total number of shares that were issued. The total number of shares outstanding is filed on a quarterly basis with the Securities and Exchange Commission (SEC). Also, the company's annual report includes the total number of outstanding shares.

What is authorized share?

The authorized shares are the originally distributed shares of a company, regardless of whether they are owned by institutional investors, insiders, or the public. A business is legally allowed to issue only the authorized shares of a business. The number of authorized shares is always equal to or greater than the number of issued shares.

What is an issued share?

Issued shares refer to the number of shares of a corporation that are held by shareholders. The shares may be exchanged for any form of asset that the company believes will help capitalize the business.

Do stockholders have to give consideration?

A potential stockholder is not required to provide any consideration in exchange for the shares of a company unless it's expressed in the company's constitution. If consideration is required, it may come in the form of cash, future services, promissory notes, personal or real property, or even other securities.

Is retirement stock included in stock?

Retired shares are not included in the two types of stock. A share of stock is only issued once and may be exchanged between investors an infinite number of times. Treasury stock is a portion of the total shares that a company keeps in its own treasury. Treasury stock comes from a repurchase, a buyback, or shares that were never issued to ...

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.

How Many Shares Should Your Startup Authorize Upon Launch?

José Padilla is an attorney and the owner of Padilla Law PLLC, where he represents startups and investors. His practice focuses on the formation, seed and VC financings, private equity, acquisitions, strategic corporate transactions, and general advisory regarding corporate and financing strategy.

What is the difference between authorized, issued, and outstanding shares?

The number of authorized shares is the maximum number of shares that a corporation is legally allowed to issue to its investors and stockholders. When a corporation is formed, founders will submit a certificate of incorporation (also called the “charter”) to the appropriate Secretary of State.

How many shares do startup founders need to issue?

The commonly accepted standard for new companies is 10 million shares. When you build a venture-backed startup designed to scale, you will need to issue shares to an increasing number of employees.

Summary

Investors are used to seeing 10 million shares, but you can choose any number to authorize. The key is to have enough shares to issue additional shares to incentivize employees and to raise funds from investors without immediately having to amend your charter every time you wish to issue additional shares.