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I set up a company with 1 share.

The company is now attracting investment for which we will offer, in total, 20% ownership of the company. These would be B Ordinary Shares - with the only difference from the A Class shares being that they don't carry voting rights.

In addition, I wish to give someone who has been working on this part-time (and will continue to do so), 5% of the company. However, in this case, a vesting-period of 3 years would apply with a cliff after 1 year.

As a result, I would retain 75% of the company; 20% will be given away within the month and further 5% will accumulate over 3 years.

SO:

How do I go from having 1 share issued to the above scenario?

Some things I need to consider:

a) I wish to avoid unnecessary tax consequences (eg, by splitting my share as opposed to issuing new ones)

b) The 5% vesting shares should revert to me, not the company, were they not to vest

c) I wish to 'future-proof' any further investment rounds (eg Series A investors)

One scenario I was considering was to issue 74 shares to myself (bringing me to 75), 20 to the new investors and 5 to an option pool which would vest. BUT, I'm not sure if the option pool can revert to me if unvested. More importantly, if the 20% shares for new investors was bought for, say, £100k, I don't know if that means that I have just given myself an asset now worth £350k and whether that then carries tax or other implications.

I know this should be easy, but I'm really perplexed.

Thanks

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You should probably talk to an account and/or attorney in the state/province/country you are doing business. I would also think that you'd issue more diluted shares this time around - like add a 0 to the end of your numbers above. – TimJ♦ May 17 '10 at 20:57
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+1 for getting a proper tax accountant's advice - although in theory not too tricky, knowing what you're doing at this stage is important as it could have significant tax implications further down the line. – Steve Wilkinson May 18 '10 at 6:50
Thanks Tim and Steve. We are indeed getting advice from both our accountant and attorney. However, I was also interested in the views of those in this forum if they have gone through a similar process. – Stealth May 18 '10 at 10:05

1 Answer

up vote 3 down vote

I'll try to remain polite, but kind of crazy advice have you been receiving so far? You incoroporated a company with 1 share? This is unheard of. Is this a C corp (hopefully in Delaware, but not necessary)? Do you have any idea how complex of a structure you are trying to build by having two classes of stock ufront, just to give away 5%?

Just give away the 5% by splitting your share into one million shares. Don't worry about voting rights. You should be the sole director, that's what matters really.

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+1 - being correct instead of politically correct: it was stupid like crazy to start with only 1 share to start with. – NetTecture May 18 '10 at 6:29
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Thanks Alain. I should have been more explicit than just using the '£'symbol - it's a UK company. The concept of authorised share capital was abolished here in October last year and it is quite common for a founding Director to take just one share. They then lend money to the company (which has a tax, interest and repayment advantages). It is more flexible than locking money in as share capital. I'm offering 25%, not 5%. 20% to investors who are putting in money in the next few weeks, a further 5% to someone who is putting in time and expertise only. The latter will vest over 3 years. – Stealth May 18 '10 at 10:05

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