Equity Allocation

When forming a corporation, founders must decide how the equity should be allocated. In order to do this, founders typically consider:

  • the relative percentages of the company each founder should own,
  • a rough sense of what percentage of the company will be owned by employees and consultants, and
  • whether they want to informally set aside shares for the possibility of entering an accelerator program (e.g. Y Combinator) or adding additional co-founders.

Using the standard 10,000,000 authorized shares, an example of a typical allocation would be:

  • 8,000,000 shares divided among the founders
  • 1,000,000 shares to be reserved for issuance under a stock plan for employees and consultants1
  • 1,000,000 shares informally set aside for accelerators or additional co-founders

The corporation can always amend its certificate of incorporation to authorize more shares. This requires additional time and legal expense, so founders typically try to allocate shares at formation in a way that minimizes the chance a subsequent amendment will be required.

Note that simply setting aside shares to be issued under a stock plan does not create a stock plan. Stock plans must be formally adopted by the corporation in order to exist.

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