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How should co-founders split the shares when they form the company?

EquityFormationVesting

The customary setup for a startup corporation is 10,000,000 shares of common stock authorized in the charter, most of them issued to the founders at formation, and the remainder left unissued with a block reserved for a stock plan. The founders decide the split between themselves; the documents only record it. Authorized shares are the ceiling the charter allows. Issued shares are the ones people actually own, and your percentage of the company is your share of what has been issued, not of what was authorized.

Authorized against issued

Take two founders who authorize 10,000,000 shares, issue 4,000,000 to each, and reserve 1,500,000 for a plan. Each founder owns half the company today, because 8,000,000 shares are outstanding. Once every reserved share has been granted and exercised, each owns a little over 42 percent. Round numbers like these exist so that a grant to an early hire can be counted in thousands of shares rather than in fractions of a percent.

Why par value is tiny

Par value is the minimum the company must receive for each share. Delaware's statute requires that shares with a par value be issued for consideration worth at least that par value, and the customary figure is $0.0001. At that price 8,000,000 founder shares cost $800, an amount a founder can pay in cash or by assigning the code and designs built before the company existed. A high par value would make founder stock expensive at the one moment it is worth almost nothing.

How the split gets decided

Equal splits are common when the founders start together with the same commitment. Unequal ones usually reflect who had the idea, who has already put in a year, who is putting in money, or who is staying part time. Whatever the numbers, every founder's shares should vest, so that a founder who leaves in month eight does not keep a founder-sized stake. The split you choose today is the one every later round dilutes, which is worth seeing in numbers first.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.