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We just incorporated and are now bringing on board an advisor. We want to give him %1. Our company consists of me and two co-founders, each with 1 million shares. Our total authorized shares are 5 million.

Now do we have to give him shares from our own allocations, or do we issue new ones to him? In the first scenario, we give him 10k shares each and we're all good. In the second scenario, we technically need to give him 30303.03030... shares total. In that case, how do I deal with this issue? The document asks for both percentage and number of shares, so I'm not sure if I can just put down 1% and 30303 shares if they're not exact equivalents.

If it makes any difference, we're using the FAST document, are based in California, but registered in Delaware.

Thanks in advance for the help.

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3 Answers

up vote 2 down vote

Just agree to give him 1% (which, is an arbitrary amount) when your company is ready to raise your first round of capital. OR, if you raise no money he will receive dividends as a 1% stock holder. The actual number of shares will be clear when your company is up and running.

The problem is that your cap table is far from settled and you are forcing decisions like this that will no doubt come back and bite you.

This is another classic case of how using a fixed equity allocation causes problems. You don't actually have to issue him anything. Nor do you have to issue yourselves anything. Whatever shares you doll out will have nothing to do with how you run the company. Your allocations will continue to cause problems every single time you want make a change.

The solution to your problem is a dynamic equity split, this will allow you to track how much each person actually deserves and only issue stock when it's appropriate.

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I'm not sure about the part where you mention that we don't have to issue ourselves or him anything. In his case, yes, we can figure out a deal for him to receive shares later. But in our own case, when we incorporate the company we need to state our number of shares in it, so we do have to issue shares to ourselves. As for the changing cap table, I'm sure he already knows that his share of the company is going to be diluted the more shares we issue later on. Why is that necessarily a problem that's gonna come back to bite us? I'd appreciate if you could help me understand your point. – NeonBlueHair Jan 27 at 20:03
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It seems that it would be favorable to both you and future investors to make a stock transfer as cleanly as possible. The number of stock-holders is small, so my vote would be to use the existing shares rather issuing new shares.

A related point is that Delaware has the following calculation of franchise tax based on your issued shares, so this may be another reason generally to keep the total number of issued shares below a certain threshold:

http://corp.delaware.gov/frtaxcalc.shtml

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up vote 0 down vote

It's much easier to have the corporation issue shares to him rather than take shares back from investors and transfer them to the advisor. Note that there's nothing wrong with changing the FAST document so that it doesn't include percentages, but only includes a raw number of shares. Heck, it's probably better that way, since a raw number of shares is never subject to the question "1% of WHAT?".

Note that this is especially true if the founders' shares are subject to vesting.

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Interesting point about removing percentages. Might end up doing that. It makes sense, given that the percentage is based purely on the number of shares, and is just a way to give people a better idea of how much of the company they own. The legal incorporation papers of the company have no info about percentages, only share numbers. – NeonBlueHair Jan 27 at 20:00

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