How many shares for investors?


1

I want to incorporate a new company and authorize 10MM shares. I also need $50,000 to get started. I am considering inviting friends and relatives to invest, and issue them shares. I want to own 50% of the company and I also want to reserve 4MM shares in the company to sell later - because I will need to raise an additional $1MM to expand the business globally later.

Will it be fair to allocate the remaining 1MM shares among the people who invest the $50k now? What should I do instead.

Thanks.

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asked Nov 7 '11 at 21:03
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Olu
6 points

2 Answers


2

The number of shares you give to your investors depends on how much of the company they are buying.

For example, if you issue 1,000,000 shares for yourself and 1,000,000 shares for your investors, and the investors put in $50,000, then the company valuation is $100,000 and the investors own 50% of the company while you own 50%.

  • If, later, you issue another 1,000,000 shares to follow on investors for $1,000,000, then the company valuation is $3,000,000, the first investors will now be "diluted" and only own 1/3, the new investors will own 1/3, and you will own 1/3.
However, if you start out by issuing 5,000,000 shares for yourself and 1,000,000 shares for your investors, and the investors put in $50,000, then the company valuation is $300,000 and the investors own 1/6th of the company while you own 5/6ths.

  • Then, if, later, you issue another 1,000,000 shares to follow on investors for $1,000,000, then the company valuation is $7,000,000, the first investors now own 1/7th, you own 5/7, and the new investors own 1/7.
As you can see the critical number here is the valuation that the investors agree to, which determines how large a percentage of the company each investor receives. That's why so much talk in early-stage investing is about valuations.

The number of shares that is authorized is completely irrelevant to the calculation. Only issued shares matter. Any shares which are authorized but not issued are kept "in the company treasury" which means that they are owned by the company, which, in turn, is owned by the people who have issued shares. That means that they do not affect the split in ownership of the company... only issued shares determines the split in ownership.

answered Nov 8 '11 at 10:33
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Joel Spolsky
13,472 points

1

It would be fair if they are happy ending up with 10% of the company at the end. Which I would not be.

With a capital requirement of 1 million you will likely NOT end up owning 50% of the company at the end. Sorry.

answered Nov 8 '11 at 01:22
Blank
Net Tecture
11 points

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