Everything You Need to Know about How to Issue Shares in a Startup

Has your startup reached the stage where you're trying to acquire funding from investors or sell shares to attract top candidates, and you're thinking, "how to issue shares in a startup?"

One of the most significant issues startup entrepreneurs face is startup equity distribution. A company's shares are a valuable commodity for startup entrepreneurs. It should only be distributed moderately among the co-founders, early staff, and advisers and traded with potential investors until the business can sustainably support its growth.

If you give away too much during early rounds, you won't have any money left for future investors or workers. In this guide, we will go through everything you need to know about how to issue shares in a startup, so keep reading:

What is the Role of Equity in a Startup?

Startup share equity is the stake that a firm's stakeholders should receive in the company. Typically, this entails allocating a portion of ownership to early contributors like investors and employees.

The timing, level of participation, level of commitment, and the company's valuation at the time of stock distribution all play a role in determining that percentage. Equity distribution and finance stages are interconnected. Your financial situation will inevitably change as fundraising rounds advance. In almost every case, your equity distribution plan will also change.

Which Factors Should You Consider Before Distribution of Startup Company Shares?

Before you learn how to issue shares in a startup, you should keep in check the following factors:

Number and Price of Shares

Before learning how to issue shares in a startup, the first stage is to decide how many stocks you want to release and at what price. Don't issue shares for less than their fair market value because there may be tax implications.

Suppose any unique valuation standards, such as the safe-harbor value rules under an ESS or ESOP, might be relevant. In that case, you should consult a tax attorney. The issuance of additional shares will dilute the current shareholders' ownership, so this must be carefully examined and approved before the distribution.

Vesting Schedule

You won't know how to issue shares in a startup until you learn about vesting schedules. These schedules limit when a person can exercise their stock options. It prevents someone from taking the stakes and leaving the company right away. Thus doing this would keep you secure. Vesting schedules are most effective for the company's founders, workers, and advisors. 

The following are typically the most frequent vesting provisions:

• An annual cliff.
• Acceleration with a single trigger.
• A vesting period of four years.

Most businesses use vesting schedules to deter employees from leaving and lower the possibility of equity dilution. Each Stockholder's Equity must vest in equal installments over four years, once a month, in 48 stages. All vested stock is forfeited if the employee departs the startup before the first year has ended. Conversely, if the startup ceases operations before all shares have vested, they vest automatically.

Review Compliance with Securities Law

The most crucial factor in how to issue shares in a startup is to review compliance and securities law. When you want to give more shares, you must check the Articles of Incorporation and abide by the law. Make sure you have the number of shares you intend to issue. Before you offer or sell shares in the state where you established your startup, you should follow federal and state securities laws.

Get Necessary Approvals 

The next step to learning how to issue shares in a startup is to check the founding documents of your startup. You can see if these documents include a particular protocol you must adhere to when issuing shares. For instance, the firm's constitution might specify that the board must authorize issuing shares. 

The existing shareholders can also be given first refusal privileges over the new stocks under the terms of the firm's shareholders agreement. It implies that before offering the shares to a third party, the corporation must first make a sale to the current shareholders.

You should also ensure that you have the authority to do so under your company's bylaws before issuing preference shares to an investor. The board of directors or the shareholders must vote a resolution to authorize the share issuance once your corporate or legal staff has decided which approvals you need.

Prepare Security Law Files

To issue shares in your startup, filings with the state administration for securities or the SEC (Securities Exchange Commission) are usually necessary within 15 days following the sale of stocks. So, be careful to file your documents on time.

Issue Stock Certificate

After selling the shares, the organization must provide a stock certificate. Ensure that the proper organization officers have numbered, signed, and dated each certificate. It is best to make copies of each stock certificate for the company's records.

How to Issue Shares in a Startup?

You must learn about equity distribution for founders, investors, advisors, and employees if you want to know how to issue shares in a startup.

Equity for Founders and Co-Founders

The most crucial step in equity distribution is how to issue stock to founders. Calculating your ownership in a firm might be simple if you are the only founder. However, you shouldn't rush the share allocation if you have a co-founder or multiple co-founders.

It can be challenging to decide how to issue shares in a startup since it's impossible to predict how valuable the company will be and how each founder will contribute to that value. In essence, you shouldn't distribute too much of your stock without determining what you would get in return.

The best place to start when deciding how to issue shares in a startup is by considering each founder's long- and short-term contributions. For example, some of your founders could hold key corporate positions like CEO or CTO. In contrast, others might only be actively involved during the firm's beginning and take a back seat later.

Equity for Investors

All the investors in your firm, whether they are angel investors, venture capitalists, or close friends and family, should be given a share of the equity pie. Investors who invest in a startup effectively take on financial risk to earn an economic benefit.

Generally, it is acceptable for investors to receive a larger share of the equity than advisors and employees because they have a more significant investment in the startup. Consider the amount invested and the market value of the business when calculating how to issue shares in a startup.

Equity for Advisers

When you learn how to issue shares in a startup, knowing about equity distribution for advisors is essential. Early-stage companies typically feature an advisory panel of veteran founders and experts who help the company with business strategy. 

You can pay these individuals with stocks. In a startup, advisors are crucial because they have the skills and background to carry out your tasks. Their suggestions frequently help the business succeed and achieve new heights.

When deciding how to issue shares in a startup, there are no set rules about share allocation to advisors who volunteer their time and knowledge to support the expansion of your startup. However, many businesses provide their consultants with between 0.2% and 1% of their shares.

Establishing expectations with the advisors as you develop advising partnerships is essential so they can understand the level of commitment you anticipate from them.

Equity for Employees

Startups initially lack the funds to pay staff their partial or complete salaries. The likelihood that an employee will remain motivated to work for your firm decreases if you are unable to provide them with a salary that is competitive with the market.

Issuing shares in a business to your staff is the most acceptable method to reward them. It would keep them engaged and motivate them to work more to raise the company's worth. However, many firms choose not to provide these incentives to their staff members because they recognize the drawbacks.

The complexity it introduces and the high tax the employee must pay for receiving the shares as compensation are its two primary drawbacks. 

Final Verdict

Treat your stock like gold; it's your most precious asset. Try to avoid making beginner mistakes when you learn how to issue shares in a startup because they will bite you in the rear and affect the investors, founders, and staff.

Suppose you are wondering how to allocate shares in a startup. In that case, we advise you to keep track of your firm's share allocations when you create your startup and work on the startup equity structure. It would make it easier for you to understand where the shares are, who owns how many, and how much dilution occurs due to an issuance.