Hi Yakom

Very good blog here mate! I am in the process of incorporating and offshore company to deal in Precious Metals Trading. I would appreciate if you could advise me in the start-up share allocation for a company authorised to raise $1m .

Share Authorisation –IBC2

One Million Shares

Par Value US$1 per Share

Share Classification

Class A Share

1 Share = Common Stock Full Voting Rights

Subscribed to by IBC 1

Class B Share

999,000 Shares = Common Stock or Preferred Stock (I think Preferred Stock)? NO Voting Rights

Allocation Maximum 49 % = 489,510 shares Subscribed to Private Equity Investors, however it will only equate to start with towards the initial capital required for one consignment value to be traded within a normal trading cycle, so it will not be that 49 % of Class B Stock is fully issued to start with. Probably in the range of 4-5% of available shares would be allocated per trade.

The value of our shares offered/allocated would be in that what investors would be willing to pay for them in return for a company that has a;

1) Good concept
2) Good business plan
3) Good ROI
4) No future IPO'S will be entered into
5) No dilution of fixed share value -the reason I say fixed value is that shares allocated /issued will be a set capital value required to enter that trade cycle. Prior preferred stock issues will have priority for dividends as per ROI for their respective cycles, as well as priority over common stock holders. So no pre-emptive rights or subscription warrants are necessary.

The Other 50 % of Stock will not be made available to start with and will be held in reserve so as to avoid hostile takeovers as such I don’t think there could be as IBC 1 owns IBC 2. Would that be right?

Also I would think that would avoid major hassle with Venture capital funding as they wouldn’t be interested in lack of common stock and we wouldn’t be interested in hostile takeovers any way’s.

Thank you in advance if you answer me

tommy

@tommy - you should consult with you own attorney, as you will clearly need one to set up the structure that you have outlined.

Dear Yokum,

I am incorporating my business in California. It's a small Private Catering Company and it's basically a one person operation. My lawyer is asking me about a number of shares to be issued and I don't know what's best for tax purposes. I don't really know how it works the more shares are to be issued the more you pay in taxes? The lawyer tells me they normally issue 200 shares, which compared to the numbers I see in these posts seem pretty low. Can you please give me some advice. Thank you.

@Annabelle - if it is a one person catering company, a low number of shares is fine.

My husband is a general contractor. His company, owned only by himself, no partners or co-owners, was previously an LLC. I just dissolved the LLC in order to start up a C-Corp (research has proven better tax advantages...and, besides, GC's aren't protected personally by an LLC in California so it was completely pointless). Our newly appointed CPA suggested the C-Corp and, being the internet research loving person that I am, I have read and read and read up on it. I guess trying to sound smart and informed when I met with this CPA backfired because he gave me the homework of creating the C-Corp myself. Well, I don't want to pay him to do it anway. But I am having a hard time with just one thing...issuing shares. My husband has no intention of sharing the company anytime soon, if ever, or of taking on any partners in the future (unless serious luck is bestowed upon him and overnight this company turns into the equivalent of KB Homes). So, lets just say for now that he is the only owner, he is the only owner that will ever exist, and any future employees will not have any options to purchase stock. How many shares of stock should we list on the Articles of Incorporation? Heck, why does there have to be any shares anyway? All these huge numbers (10mil, 100k, etc.) seem ridiculous. It's just him, doing most of the physical work by himself...and me sitting at the computer typing up his invoices. I just want to be able to write off more stuff and not be subject to self-employment tax. Can I just type "This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized to issue is 10" under Section V?

@Rachael - yes, 10 shares are okay. Most people would do 1,000 so there is a little bit more granularity in the event additional shares will be issued to others, like family members.

Hi, Yokum, we don't have the cash to hire the lawyers right now--can we do a simple incorporation with only common stocks now, award investors common stock now, and later change the angel investors common stock to preferred stock? Would that be done by holding a board meeting, followed by voting to change the articles of association (and filing an amended articles with the state, with lawyer help), then voting to change the common stock already issued to these 2 investors to preferred? Is that chain of action possible? Thank you for your reply!

I am incorporating in California (C corp), transitioning from a bootstrap business to one where we have two angel investors committed to putting in $200K. They are to get Series A preferred shares (@ $1 par value), and we also will have common stock granted to myself and my CTO for services to date (vesting to start June 2009 when we began the business, total grant 267,500). We're leaving 82,500 for the future common stock pool. Total valuation $550,000. Now that I'm filing for incorporation, do I need to put both the Preferred and the common stocks into my articles of incorporation (we're planning to use an online incorporation service to expedite things)? Or can I file with the standard common stock template and then amend the articles? Don't want to make a delay because we would like the money to come in ASAP, of course. Is it complicated to put two types of shares into the articles? Can I use a template I have or must I use a lawyer to do this Article IV? Thanks so much!

@Maria - you need an attorney to help you. What you've described is beyond a do it yourself project.

Hi Yokum, incredibly thoughtful blog. Thank you so much.

One issue I have not seen explicitly here is the equity distribution for founders as they approach Series A. Here is the issue, I have been advised that a 40-40-20 split (40% founders, 40% preferred and 20% ESOP) would be desirable for a tech startup reaching Series A. This split is an assumption upon arriving at the Series A with this 40-40-20 split. In other words, of 100M shares authorized, founders split the 40M shares, another 40M 'preferred' shares is reserved for possible Series A investors and 20% is on the high side of normal for what investors would like to have on hand to hire new employees immediately after Series A funding. First question: does this ratio seem plausible to you? Too conservative?

Second: If founders have not used up their 40% (of 10M authorized) and reach Series A, what happens then? Should founders grant additional shares to each other prior to reaching Series A?

Thank you.

Is there any way for emplyees of an LLC to be able to buy into a form of stock certificates?

@Joel - Depends on the LLC Operating Agreement (if any). Most people hold ownership interests in an LLC, as opposed to X number of shares, unless the Operating Agreement provides for units or shares.

I am incorporating a CA c-corp. I have $2000 cash investment and $3000 in ppe invested. the price per share times the number of shares have to equal 5000?

In CA is there limits or fees for to many shares outstanding?

Hi Yokum,
Thanks for these informative and very easy to understand/read blog articles. My friends and myself ( total of 4 individuals) decided to start our own software company, we have an idea, business plan and all of us are basically the only owners/employess. We did not invest any cash into it or assets aside from our personal time and dues to certain vendors. We wanted to register the business as a C Inc. How many shares should we issue in the situation like this, since there was no initial cash investment involved? Should we incorporate it or would it be a better idea to form LLC ( or any other type?) at first while we're still working on the product development?
Thanks in advance,

@jemimi - you should discuss this with your own attorney as there are too many fact specific issues.

Yokum you are so kind to help and give of your time to all of us.

I'm currently writing my Articles of Incorporation as a new c-corp start up.

I am having the most difficult time finding information whether or not to include preferred shares in the initial issue.

I'm not much of a finance person so I am not too familiar with it all.

Do I need to worry about issuing preferred shares? We plan to bootstrap as long as we can.
If I do need to issue some preferred shares, do I or my co-founder take any those or are they solely for investors?
What percentage of my total shares issued should be preferred? If we need to issue preferred shares right now.

Again, thank you for your time and help.

@Jamesjk - Most companies that intend to receive investment from venture capital investors do not include "blank check" preferred stock in their certificate of incorporation. It isn't prohibited -- it's just customary practice to not include it because the venture investors will remove it later. Generally speaking, you do not have to worry about authorizing preferred stock at incorporation.

Can you authorize shares with LLC? Is the number of shares different for LLC from S-corp?
What methods do you use to "assume" the initial price of a share?

@msasha - You could issue "shares" with an LLC, but it would require a custom complex LLC operating agreement. This is not a DIY thing. You should engage an attorney.

I've been invited to join a new start-up company by an old friend. He has offered me 30,000 shares of what I'm sure will not be preferred stock. It will be a privately held company with a plan to have a liquidating event in 5 to 7 years, a plan that he did almost to the letter with a previous start-up.

I'm a novice at this and I have no idea if 30,000 is a good number or not. I'm wondering if I should negotiate for more shares? Or is it more important to investigate the price at which they are valued now? Or other info I would need to know from him?

Any advice? Thanks much.

Hi, This seems like a great blog but I have to admit I only understand half of it. I'm in the process of creating a Limited company in Ireland (may not be your market, but maybe you could give me some general advise). When I started to form the company I was told that I should authorize 1 Million shares of 1 EUR each and have 100 issued shares. When I asked why I was told this is the market standard for startup companies. Now my silly question:

1. Why can't I just create 100 authorized shares and issue 100 shares to the 3 share holders in the company?
2. Is it not better for a startup company to have less authorized shares?
3. Even if we do plan to get investors in at some stage in the future, will they not just take a percentage of the company? (For me it seems not really to matter if I give away lets say 100000 of my shares to a investor or 10% stake in my company)
4. If I only have 100 issued shares between me and my business partners and 1 Million authorized shares and just for arguments sake say, an investor comes in and want to receive 1000 shares would that not make him the major shareholder in the company and would I not lose control over it?

I'm sorry for my silly questions but I'm trying to get my head around this and can't seem to find the right answers. I hope you can help.

Many thanks
Carsten

@Carsten - I have no particular expertise on Ireland.

1. Sure, you could if it were DE.

2. There may be some franchise tax advantages to having a low number of authorized shares in DE, offset by negatives associates with the numbers being off market..

3. Yes, it's just math, but it's market practice.

4. Yes.

Hello, just came across your article. I just created an LLC through Intuit. There was an error an only about 10,000 shares were created, but I was trying to go with 10 million, as you say, to have all the extra available. Is there a way to create additional shares as a company? I can't seem to be able ti find this information. Thanks.

Do you have to have shares available? For instance, I am starting up a business, Event Planning. I have decided to as an S Corporation. When asked share questions I am a bit confused as I am sole owner. I have two investors but they are getting a return on their money by other means than shares in the company. Do I need to have shares disclosed when incorporating?

@Kim - You need to chat with your own attorney. I don't really know where to begin since the questions reinforce that you are confused. You have to have at least one share authorized in your COI. Many technology startup companies will authorize 10 million or more.

I am a owner of a company and I owned 100 % of the company. I issed myself 10,000 initially when I formed the company. I am wondering what value should the shares be? Working on my bylaws and wondering what should be the par value of the 10,000 shares. Or the value of the shares?

@Trixie - You should engage a local attorney or accountant to help you with these questions. If you already issued the shares, you should have paid for them. The par value should be listed in the articles/certificate of incorporation.

Hi Yokum,

I know this post is old, but I am in the process of creating a C-Corp in California, and this post almost answers what I am looking to get answered. I am hoping that maybe you can help me work out the finer details.

I have been operating a website for a little over a year now, and now we are looking to raise capital, so I need to make the business formal - basically, I've been running the company, but it hasn't been a legal entity. Currently the company has no revenues. We are in the process of raising an Angel round (we intend on doing a VC round too), and I've recently brought partners on board so it now needs to become a true company.

I have put about $30k into it so far, and hundreds, probably thousands of hours into it. A few months ago, I brought two people on board, both working entirely for equity - they haven't brought any capital into the company. Between those two, they will own 15% of the company, I own the rest for now. One outright owns 8% since he was always worked for equity, while the other is "earning" his 7% over the next year since he was initially paid for his work (1099 worker).

More to the point, what is a good number of shares to start with for a structure setup like ours? And how do I value the par? I've read here and elsewhere that between 1M and 10M is a good number of shares to start with. Is that true? and what are the benefits of doing 1M vs 10M shares?

Should the par just be valued off of what I have actually put into the company, or can I include the IP that we've built so far (basically just creating my own valuation based on what I think it's worth)?

When looking at the paperwork, it looks like I can authorize the board to issue preferred stock, should this be done at the creation, or will it be done when we raise the angel/vc rounds so I should just say no for now? If we do offer this right to the board from the get-go, do I need to specify the number of preferred shares?

I know some of these questions we'll need to talk with an attorney, but we don't have one yet. Do you know of any that you can recommend in the Sacramento or San Fransisco area (we're in Sac)? Ideally, someone that might be willing to defer their fees until we raise an Angel round. I'm not even positive what qualifications to look for, so any help you could provide in this regards would be very appreciated.

Thank you for your time and advice.

I have more or less the same question(s), but with a couple of key differences:

* We are doing an S-corp instead of C
* Aside from people who are getting stock because of their contributions to our project, I have one friend who wants to buy his shares. If we are not planning on taking much more investment than that, is an S-corp going to be OK for this situation? How many shares should we incorporate with?

Thanks

@Dan - if you are not planning to establish an option pool or issue more stock, then it probably makes sense to keep the authorized number of shares extremely low (i.e. 1000) because franchise taxes in some stated (like DE) can be kept low if the number of authorized shares is low. Please keep in mind that there is some administrative hassle with the S corp such as giving Schedule K-1s to the shareholders.

@Joel - good chatting with you live.

Let me start by saying it's cool your taking time to do some Q&A on your site.

My Green Tech company here in the Bay Area has been in business since 2001 and just recently became a California C Corp 8 months ago. I am the sole owner and for the first time am looking to raise some investment capital for the company. I am inexperienced in corporate capitalization and have found attorneys with their billable hours make for expensive teachers. Do you have any recommended books that can get me up to speed on the topic of start up capitalization.

Thanks

@TK - Try the Entrepreneur's Guide to Business Law by Bagley/Dauchy. There is an Amazon associates link on this blog.

Hi Yokum,

Thanks for the info, and sorry to bug with the umpteenth question about this but.....

I've been told that you don't want to issue all the stock because that is what's given to investors. Example, I authorize 10 million shares, take a million for myself and my co-founder. That leaves 9 million which I am guessing can then be sold to investors.

But I've also read that you can authorize the same 10 million, issue 8 million for example to co-founders, and the remaining 2 million for the option pool. In this scenario, if an angel investor comes on board, would they buy shares from the co-founders, or would the company need to authorize more shares?

@Rich - The company would authorize more shares (typically preferred stock) and sell newly issued shares to the investor.

Great blog, Yokum...and very active. I was wondering about authorizing preferred stock. I am incorporating in CA, planned on authorizing 5mn common shares and 2.5mn preferred shares with 1mn common being issued. Does it matter if the preferred shares are authorized if they won't be issued at this point (unless an investor knocks on the door tomorrow, of course)? My thought was that I would have them at the ready.

Thanks for your feedback.

@Steve - There is no point authorizing preferred stock now, as the investor will dictate the terms later and it is impossible to 100% predict the terms.

Hi Yokum,

I currently work for a SaaS company that is looking to form an IPO in the next two years. I was offered 10,000 shares and we recently received our strike price of $.10. I was curious to see your opinion on SaaS companies. How do they traditionally open in the market? Your suggestions on investing in SaaS companies, thoughts on additional stock options being offered to me, and any opinions, suggestions, or knowledge you offer, I would greatly appreciate it.

Thank you!

@George - I think it's hard to comment without more facts.

Sir, this is an extraordinary resource. Thank you for your good efforts in educating the entrepreneurial masses.

I'm trying to decide whether to incorporate in California or Delaware. I live in California and hope to do business all over the United States, primarily via the Internet. (There would be no brick-and-mortar presence.)

I've seen that you advise companies to authorize 10 million shares of common stock when first incorporating, at a value of $0.001 or so for founders to purchase. Would that advice be the same whether incorporating in either Delaware or California?

If I were to incorporate in Delaware, and had clients who were in, say, Michigan, Tennessee, Texas, New York, would I need to register as a foreign corporation in California?

Thanks again for sharing your expertise.

@Roger - The suggested number of shares assumes that the company will raise venture financing and grant options to employees, regardless of DE vs CA. If a company has employees and an office in CA, then it will likely need to qualify to do business in CA. Please read the disclaimers and consult with your own counsel.

Question- My friend and I just started a new company, a Delaware LLC, we are planning on splitting up the equity equally and leaving 10% of the authorized shares as the option pool for future employees. How many shares is ideal to authorize and issue? Is there a standard number? Thanks, Mark

@Mark - The concept of shares and options in an LLC don't necessarily map over to what one traditionally thinks with a C corp. Also, LLCs can't grant ISOs and there is not such thing as an "off the rack" option plan for an LLC. There is nothing "standard" with an LLC.

I need some advice about starting an S Corporation. What is the right class of stock, par value and number of shares and outstanding shares. I am a raw start-up with two clients and have invested $6,000 into the company.

@Jaggie - Sounds like you are at ground zero for needing advice. You should engage an attorney to help you. That being said, S corps can only have one class of stock. If there is only one founder, par value and number of shares is simply math.

Great Info, Ok so I set up my corp with 10 million shares 7.5 million to founders, 2.5 million to investors.
Can I write a provision on common stock to protect the invest in case of dilution? If I give them preferred, I'll lose the direction of the company. Maybe remove if they don't like the way I'm going? I want to have board rights and control to make sure this company gets to my vision. Wyoming has protection of liability and no limit on shares. I'm planning on my doing business in Texas. Should I file as a foreign corp doing business in Texas for I get the liability protection from Wyoming, and then how will I be taxed on more shares like the 10 million on different states I'm in. Is this going to cost alot more tax wise on these high shares???
Thanks,
Tom

@ Tom - I can't comment on Wyoming or Texas. If you want to create a mechanism to protect common stockholders against dilution, there are some contractual ways to do it, such as via a warrant that is exercisable for a certain number of shares if there is a dilutive event. You need to speak to your own counsel.

Yokum: I have recently joined a startup company that is planning a "rollup" of existing companies, so not your typical startup. I understand issuing 10 million common shares at incorporation, creating an option pool, etc. However, we plan to use company shares as "currency" to make acquisitions along the way. Should we use common stock as this currency, or create an option pool specifically for these acquisitions? If the former, we will have to authorize many more shares than 10 million, most likely 50 or 75 million.

Great blog, thanks for sharing your insight!

@Rick - Acquisitions are individually negotiated. In a private-private stock deal where the target is venture backed and has preferred stock, it may be difficult to get the preferred stockholders to forgo their liquidation preference going forward and receive common stock in the acquiror. Sometimes, the target preferred stockholders receive acquiror preferred stock and the target common stockholders receive acquiror common stock. The number of shares to authorize is simply simply math. Unless a company is going public, it probably doesn't matter other than optics. A larger than normal authorized share number is fine, keeping in mind that the valuation of the company needs to be relatively high in order to support a large fully-diluted share number, otherwise the price per share will be unusually low.

Hello
Forming a new C-Corp with $750,000 of D504 over the counter investors. I would like preferred stock for the founders. Common stock for new investors. Is this correct or do I new all common stock say 10,000,000
with 2 founders, having majority of the common stock and no more than 20% of common stock going to the investors. Should I leave 25% for investors and 75% to founders?? Nevada c-corp? please advise!!!
Thanks

@Tom - Most companies issue common stock to founders and preferred stock to investors. Doing the reverse will likely not be acceptable to investors. Issuing both founders and investors common stock is fine, but please read the post "What is preferred stock and why is it issued to investors?"

@Mark - yes. Please go ask your own lawyers these questions. ISOs need stockholder approval, however.

For a California C-Corp - Assuming we have authorized sufficient shares in our articles, may the board grant stock options without additional shareholder approval? I tried to do some research, and it appears that CA Corp. Code section 404 says that this is ok. Is it?

@Tristina - For a company that doesn't intend to raise venture capital money and grant stock options, it probably really doesn't matter on the number of shares. Depending on the state of incorporation, you may want to keep the authorized share number fairly low to avoid paying unnecessary franchise taxes. The number of shares is simply math in proportion to the number of shares held by you. In any event, you should keep the par value nominal.

Thanks for taking the time to answer all of our questions. I am incorporating my business to protect my assets as right now I am simply a sole prop. with a dba in Santa Monica. I have spent approximately $70,000.00 and started doing business yesterday, November 1st! I have a non-equity partner whom I decided to make a 20% partner as she busts her butt in time and efforts in my store. Even though I was a paralegal for 19 years...I have no idea how to incorporate nor do I get it. How many shares should I start with and at how much par value. How many share do I offer my partner and is she considered an officer, etc. Thank you so much.

@Eric - generally speaking, "blank check" preferred stock is disfavored by investors as it allows the board to create new series of preferred stock without stockholder approval. I very rarely implement it in startup companies, and it will almost always get removed upon a financing with an insitiutional investor.

Yokum - I was surprised to see you disfavor blank check. I thought the convenience of not having to go back to shareholders for each new designation of preferred stock was desirable, and the risk to investors can be mitigated through board representation and special protective provisions in the initial designation. Am I missing something?

Thanks.

@Mike G - I don't think I've ever done a venture financing where blank check stock was allowed by VCs. (Actually, I probably have done a non-Silicon Valley one where it might have survived a financing, but I can't remember the company.) Blank check gives the board too much power, so investors would object. Similarly, most investors would never agree to taking protective provisions out of the certificate of incorporation and having them as board protective protective provisions in an investor rights agreement. Simply not done in Silicon Valley.

Is it wiser to declare the Class of Stock in the Certificate of Incorporation as Undesignated Stock rather than Common or Preffered Stock thereby the Certificate simply states the maximum number of shares to be authorized and the directors are authorized to designate the classes, series and terms, as necessary?

@Diana - Generally speaking, the price per share of common stock of a company should be fair market value. Upon incorporation of the company, the price per share can be set at any price equal to or greater than par value, as the value of the company will be the cash in the company. The typical price per share upon initial incorporation is $0.001, $0.0001, etc. Assuming 10 million shares issued, this may result in $10,000 or $1,000 of initial capital.

How do you calculate the cost of shares on a start up company and on a establish company?

@Juan - This is not something I know off the top of my head. You should discuss with a MA attorney.

Hello Yokum,

I am in the process of starting a worker cooperative organized under chapter 156b of mass general law. Our common stock will be issued to founders and member owners only as we hire and develop our employees. We plan on issuing class B preferred stock to investors with No voting rights. The Cooperative business structure is something we feel very strongly about. We hope to prevent a takeover or sale that will lead to alteration of our founding principles. We have safeguarded our corporate structure through our Bylaws. My question pertains to the amount of class B stock we should issue and at what par value. Since our dividend is based on the par value, and the cap for preferred stock dividends under Sub chapter T of the Federal IRS Code is 8%, we were thinking a high par value would be attractive to investors. $10.00 par value to be specific. The number of shares to authorize has me baffled as well. Any insight you can impart will be highly appreciated. Thank You

@Sheena - You need to engage an attorney. These questions suggest that you may screw something up if you do it yourself.

1. Sure.

1a. Either is fine.

1b. An amendment to the articles typically only changes the particular paragraph. An amended and restated articles changes the particular paragraph and restates the entire articles, including the non-amended portions. Thus, in order to read the entire articles if you do an amendment, you need to read the articles along with any amendments. With an amended and restated articles, you only need to read the amended and restated articles to read the entire articles.

4. Using a stock purchase agreement.

5. Have them buy more shares or do a stock split.

6. That's just math.

Hi,

My friend had an attorney set up his c-corp in California. The attorney didn't ask questions about my friend's future plans so he set up the corp with 100,000 shares and issued 100 shares to my friend leaving 90,900 in the treasury.
My friend sold 25 of his 100 shares leaving him with 75.

Now it's time to raise capital via a 504 offering and he wants to increase the # of common stock shares to 2,000,000.

1. Can he do a Restated Articles of Incorporation as seen on the SOS website to increase # of shares in the corporation to 2,000,000?

1a.. Or is it an Amendment to the Articles?

1b. What is the difference between doing an amendment to or restatement of the articles of inc.? ( I have the SOS forms - I'm still confused) :-)

After that is set up properly......

4. How does he issue himself more shares?

5. How does he increase the 25 shares 3 of his investors bought? (10, 10 & 5)

6. For the 504 offering, is it prudent to begin the offering with $30/share? This would sell roughly 33,000 shares and keep plenty in the treasury.

Thank you for your advice.

@Tom - You'll need to ask your own attorney this question. I can't comment on Texas. Please keep in mind that you should probably consider authorizing some small number of shares to avoid unnecessary paying franchise tax fees, but once again, I don't incorporate companies in places other than Delaware, Cayman Islands and California.

Hi,
This is a simple case for you I think. My wife and I are buying a Curves franchise and are incorporating it into an S corporation. Our initial investment was almost embarassingly small - we bought the place for $20,000. So the incorporating paperwork that I downloaded from US legal forms.com (or something to that effect) is just a drill for us. That said, I have no idea how many shares to say we want to create and does it really matter since we're not going to do anything with any of this anyway other than satisfy Texas with this bs paperwork? I'm about ready to put 2 shares worth $5 each...but I admit, I am ignorant. Again, does it matter and what would you suggest?
Thanks!

@Pete - S corps have various limitations, such as no entity shareholders and the inability to sell preferred stock, so it doesn't make sense for most startup companies after the initial stage. You need to engage an attorney to deal with these questions.

@Pablo - You are at a point where you need to engage an attorney or discuss with seasoned advisors to get your questions answered.

Hi,
I own a startup video game development company in CT. We incorporated in Texas with 50Mil shares at non-par value. We are in the process of being listed in Germany's open market. The company that is doing listing in Germany takes 25% of the company to raise between 1.5 and 2 million dollars in europe. How can i raise capital in the US? I have about 6 people who want to invest in our company from 25K to 50K. How do I do this? I am trying to get a group of hedge fund guys to team up with us but they are super busy.. How many shares do I keep for myself? How many shares do I give the Germans? and How many shares should I sell here? And how many should I keep? and last but not least, how many rounds should I setup?
Sorry for the million questions.. we need $$ really bad to continue development..

thanks!!!

So I notice you guys are talking about C-Corps but what about S-Corps? I am starting a company where there are 3 partners at 35% each. We are going to go get start up money around 100K from a private investor at first to start developing the product and after that look for angel investing. First off is S-corp the best way and second how many shares should I take out?

Thanks

You need to consult with a competent attorney.

1. It depends.
2. I don't understand the fact pattern.
3. It depends.
4. Why would he?
5. Up to you.
6. Up to you.
7. It depends.

thank you in advance for helping and i'm sorry for the many questions, here is my story.....

i'm incorporating in Delaware next week and issuing 10 Million shares. I've hired 4 engineers and a project manager to develop my patent-pending technologies. i am funding my startup using my own savings, the cost to develop the first phase of the product is $40,000. The project manager "who owns the software development company" offered to invest $10,000, which means i will only have to pay him $30,000 now to get my software/product developed. i am think about going to an attorney to establish a "Promissory Notice" for this project manager.
i've been working on this project for 2 years, and he just joined met 2 months ago.

1. How much? AND What type of stocks should i be offering him ?
2. Is his investment considered CASH or what exactly ?
3. Does he become a partial owner in the company ?
4. Does he get a share of the revenue that i'm going to generate the first year before going to investors ?
5. He also has an interest of becoming the VP of engineering, what should i offer him for this position ?
6. Should i consider him a founder ?
7. Should i issue more shares ?

please help thank you

You will probably need to do a forward stock split if you ever create an option pool or do an IPO, as the price per share will be extremely high.

Please see the post "How do you calculate Delaware franchise taxes?" to model how franchise taxes are calculated under Assumed Par Value Capital Method, as opposed to the Authorized Shares Method.

QUESTION:
I am involved in a startup. we have incorporated out of Delaware; our CPA issued 3,000 shares with a par of .01; to keep costs down (relative to franchise tax, Delaware). Moreover, the cap. contribution was $50,000.00.

Wondering if anyone in this forum can foresee any problems with this, and if there is an easy way to amend how many shares we have issued to the company? Moreover, keep franchise tax of Delaware down as well.

thank you

Having a 100 million shares issued before a financing doesn't make sense. If the company does a Series A financing and the pre-money valuation is low (say $5M), then the price per share in the Series A will be $0.05, which seems particularly low.

Yokum, I appreciate the manner in which you reduce the complex issues to simple answers. You are a boon to us all - thank you!

I am a serial entrepreneur, now advising new and emerging companies on governance and other issues. One company had issued 100 million shares before asking for help. There are only a few shareholders and I have advised a roll back before financing. Please comment - and again, many thanks.

Still don't understand the questions. You need to engage and work with an attorney as your questions are specific to your particular situation.

The issue is whether the 10% you have promised is protected against future dilution (which is should not). Thus, at the beginning, there should be a 90/10 split. If additional shares are issued in the future, then all previous shareholder would be diluted. If you don't do a 90/10 split at the beginning and don't sell the remaining shares that you had earmarked, then the 10% would end up being a much larger percentage than 10%.

Selling shares by a founder results in taxable gain to the founder. Most investors want to purchase newly issued shares so the money goes into the company.

Preferred stock has voting rights in the typical startup company context.

Sorry, I should have been clearer...

On your advice, I would authorize 10,000,000, for the purposes of example excluding any option pool.

Then, as I am a founder, I might issue myself 55%, or 5.5 million shares.

They are technically investing, but might also be considered "founders" (they are building the only true asset of the company and the difference is uncertain to me) and so I issue them what would constitute their fully diluted 10%, or 1 million shares.

This all takes place at time of incorporation.

After incorporation, I then have 3.5 million shares available to investors.

I suppose I assumed that there would be no difference in issuing myself 90% as opposed to 55% if my intention was always to give up the balance to investors. If this is not so, maybe you could help me understand how it is different (selling shares I own and reinvesting proceeds as opposed to selling shares the company owns to garner capital)...

I've considered offering them preferred stock (want to give them incentives to make me a superior website), but if preferred stock usually has no voting rights wouldn't that make them a little nervous about management, dilution, etc.?

As to the last point, I am interested in reclaiming shares while remaining fair to early-stage, smaller investors. I thought that allowing myself to repurchase the shares at a much higher price as long as it was done within a year or so of original investment (after which the option expires) was a good way to safeguard control and allow for a very good return on their investment... Keep in mind these early, early investors are going to be people I know and/or am related to.

Forgive my questions if they seem ill-conceived - I have no corporate experience whatsoever.

Thanks for your help.

I don't understand why you would issue your "investor" 1,000,000 shares and yourself 5,500,000 shares -- if you intend to only give away 10% of the company for the "investment." The problem with talking about percentages is that it isn't clear exactly what the denominator for calculating the percentage is and the point in time for measurement. If the deal is $50K of non-cash resources buys 10% of the company, then the question is whether it is 10% of the fully-diluted (including an option pool that you haven't mentioned) and whether it is 10% immediately after the founder issuances.

Issuing 9,000,000 to founders and 1,000,000 to the "investor" seems logical. Authorizing extra shares (i.e. 15 million authorized may make sense). You need to talk to an Iowa corporate attorney for advice on whether extra authorized shares results in unnecessary extra tax.

As an aside, keep in mind that issuing common stock at different prices (i.e. $0.0001 to founders, and $0.05 to the "investor") close in time can create tax problems. This is one reason why preferred stock is issued to investors.

Finally, typical sophisticated investors would never agree to a right of repurchase on their stock at a fixed multiple of purchase price or a ROFR.

Hi,

I'm about to incorporate as an Iowa C Corp and having trouble deciding how many shares I should issue. I'm starting a website and have an agency willing to invest $50,000 in non-cash resources (website and software design and implementation) in consideration for 10% of the stock.

I want to give away no more than 45% of the company through pre-IPO rounds of investment (%15 angel, %15 VC, %15% mezzanine). I'm considering their investment part of the angel investment.

My question is this: Should I authorize 10,000,000 shares and then give them 1,000,000 and myself 9,000,000? Should I authorize the 10,000,000 and then issue them 1,000,000, myself 5,500,000 and leave the rest as treasury stock?

I was also considering (for the first option) selling my stock to investors with a repurchase option or an ROFR on it. Can I, for instance, sell my shares to investors with an agreement that I may repurchase the shares for them at a multple of what they purchased them for?

Thanks,

Amos

100 million authorized shares seems high. At each round of venture financing, the company will have to amend the certificate of incorporation to create the specific series of preferred stock. In addition, many venture capitalists will not allow the company to have too many extra authorized shares of common stock. Thus, it really doesn't make sense to have so many authorized shares -- as the preferred stock (and common stock issuable upon conversion) will get authorized at each financing round anyway.

I think that any price per share to founders below $0.01 is fine. The main factor is keeping the outstanding share number within reasonable limits and not having the price per share so high that employees receiving options do not suffer from shock about the exercise price. If a founder wants to put a significant amount of money into the company, the founder may want to loan the money via a "demand" promissory note.

Very informative blog. I notice many founders initially invest a few thousand dollars since they issue their shares at a $0.001 per share. If founders are prepared to invest more, such as $30,000, for 6,000,000 shares, is there any problem with having a share price at $0.005. Is it better to stick to the $0.001 share price and just issue more shares? Or is the actual number and share price arbitary at this point as long as it is low?