When forming a company, how many shares should be issued, and at what price?

There’s no magical number, but if you are forming a company with a single shareholder then one class of shares with 100 shares issued at 1 cent each (= $1) is fine. Additional shares can be issued when new shareholders are added. This is especially true for a consulting firm or holding company, in which it is unlikely that investors will become part-owners.

Alternatively, for a startup company with a sole founder, consider 5,000,000 (5 MM) authorized common shares broken down as follows:

  • 4.5 million common shares issued to the founder, and .5 million authorized to the option plan, but not necessarily issued (until employees join the plan); or
  • 4 million common shares issued to the founder, .5 million shares reserved for new key hires at the executive level (authorized but not issued, presumably other individuals working at a reduced salary), and .5 million reserved for an option plan (authorized but not issued).

5 million is a nice, high number of shares and could symbolize the aspirational value of the company in, say, three years.

Over time, this 4.5 million will be diluted by investors when additional shares are issued. Again here, a fraction of a cent (0.0001 cent per share) or the like will ensure that the founder is paying a nominal value for those shares.

A few important high-level questions to ask are: what happens if the founder or shareholder leaves the company early, what happens if they don’t deliver on their promised milestones, and what’s the value of one person’s effort versus another to the success of the business? Timing out the vesting of equity is a different conversation than the subject matter of this article. When thinking about how to divide equity or vest equity, I recommend reading this article, “Tips and Tricks: How to Compensate a New Team Member in Equity,” and watching the Khan Academy video linked in it.

Don’t forget that valid consideration is required (by law) in order to issue shares. And also, remember, it never hurts to talk these issues through with your co-founders, advisors and partners.

For more information, check out these blog posts:

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.