I have worked with and advised so many startups in the past couple of years and I can tell exactly where their pain points are.
One major area of concern for startup founders is in the allotment of shares.
What exactly should be the ideal sharing formula?
What factors should they consider before issuing shares to Co-founders and Investors?
On what terms should such shares be issued?
“…….and so on and so forth”
There is actually no one size fits all answer to these questions as far as share allotment is concerned but here is how I like you to think about your company share capital.
Picture the share capital as a “meat pie” which you are expected to share among 3 people.
The meat pie is the share capital of the company and the three people who own the meat pie are the shareholders.
These shareholders are Co-owners of the company.
Now it is possible that the meat pie may have been bought by one of them who is now willing to share with the other two.
Or all three of them actually contributed the money used in buying the meat pie either in equal proportion or in unequal proportion.
It is also possible that an independent person (an Investor) actually bought the meat pie and gave to them to share.
How the meat pie will be shared, will be based on the particular circumstance of each case which I have just explained above.
Whether the equity will be shared equally or unequally is entirely left to the owner or owners of the meat pie as the case may be, to decide what’s best for them.
But in any case whatever you decide, it is important that you have some meat pie on reserve.
One of you may be hungry again and may decide that you want more meat pie.
Or a random person may want your meat pie so bad that he is willing to pay any amount just to have it.
Also, you may want to barter your meat pie for an essential service that you can’t afford in the future.
The point is don’t eat all your meat pie at once
A good way would be to divide the whole meat pie into two equal or unequal parts.
Keep one part away, and share the remaining part according to your share formula.
Finally, because your company’s share capital is more than just a meat pie…….
You must have a Shareholders’ Agreement!
Particularly, the shares must be vested for an ideal period of four (4) years with a one year cliff.
by Barinaada Bema Alexander