Posted by on Aug 15, 2014 in Business Advice, Featured Articles | 14 Comments
How to Split Equity at a Bootstrapped Company

This is how I organized my last company, which was what this business plan was made off of Startups 101: How to Create a Business Plan. (Keep in mind, this is an equity structure for a clothing line, and not a tech startup.  Technical co-founders may be much more important in another industry than the one I was in.)

I start all my companies with three main founders.

First, I issue 50 Million Shares to the company within the Articles of Incorporation.

Then I distribute 10 million of those shares as follows:

1,000,000 – Holdings
2,000,000 – Operations / Marketing (Me.)
2,000,000 – Finance
2,000,000 – Product
300,000 – Photography
300,000 – Creative
300,000 – Business Development
100,000 – Web
100,000 – Product consulting
100,000 – Product design
100,000 – Graphic Design
100,000 – Manufacturing
100,000 – Board Member
100,000 – Other Necessary Position
300,000 – Attorney

200,000 – Important Person you find down the line.
100,000 – Important Person you find down the line.
100,000 – Important Person you find down the line.
50,000 – Important Person you find down the line.
50,000 – Important Person you find down the line.

Down the line, I reserve the 10% of outstanding shares of the 10 million for employees.
25,000 – Employee / Board Member / Advisor / Mentor
25,000 – Employee / Board Member / Advisor / Mentor
25,000 – Employee / Board Member / Advisor / Mentor
25,000 – Employee / Board Member / Advisor / Mentor
25,000 – Employee / Board Member / Advisor / Mentor
25,000 – Employee / Board Member / Advisor / Mentor
25,000 – Employee / Board Member / Advisor / Mentor
25,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor
10,000 – Employee / Board Member / Advisor / Mentor

I make sure that all the shares vest.  I don’t allow shares to vest until after the first year for everyone except for the holdings company.  In a tech based industry, I would recommend a five year vesting schedule.  In a brick and mortar business, I would recommend ten years, since they take longer to acquire.  The reason that shares should vest is because not everyone will stick around.  Sometimes, situations will arise where it is necessary to offer up equity for a replacement if someone decides to not stick around or if someone gets fired.

Some people may be wondering why all 50 million of the shares are not issued and only 10 million are used in the distribution method mentioned above.

If I need to raise money and issue out 50% of my company to an investor, then I would have to issue 50% of the outstanding shares.  This a situation where, if all the positions listed above are fulfilled, an additional 5 million shares would be issued, bringing the total share count to 15 million.

If times are extremely rough and I need to raise more money and issue out another 50% of my company, I would have to issue out another 7.5 million shares, bringing the total share count to 23.5 million shares.

This share structure allows me to go through four rounds of financing without restructuring the company in case the absolute worst case situation arises, when cash infusions are absolutely necessary for survival, and equity is something that would need to be issued out due to desperation.

However, a savvy founder would do their absolute best to ensure that a percentage far less than 50% is issued out to the investor in each stage of fundraising.

The worst case scenario in this situation is that you, along with your two co-founders, would each own 4% of the company if you had to fully liquidate your shares.  The best case scenario, with going through only one stage of fundraising at 30%, would leave each of you with 15% of the company.

Reference this infographic I found from Marco D’Alia to see why:

Originally posted on Quora.

Leonard Kim is Managing Partner at InfluenceTree. At InfluenceTree, Leonard and his team teach you how to build your (personal or business) brand, get featured in publications and growth hack your social media following.

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  • Max

    Thanks Leonard 🙂

    This was really helpful to see and your explanations are perfectly clear to someone without a formal business education. Cheers!

  • John Schneider

    Excellent and concise. Makes for a great reference. Thanks!

    • Anytime John! I’m glad it could provide an outline for you in the future!

  • Jason

    Hi Leonard, great blog. I’d like to give my friend 1% of my company for the few hours per week he contributes. How do we formalize this?

    • Thanks Jason! If you would like, you are more than welcome to email me. I can forward you over an equity agreement form. However, it will need to be edited for your particular business. It is a lot easier to use an attorney who specializes in equity though.

      • Jason

        Thanks! Email sent.

        • Maaike

          Hi Jason, Thanks for this article! I am interested in this equity form too. Would you be able to email it to me?

      • Yas

        Hi Leonard,

        Thanks for sharing this useful guide. I would also be interested in the equity agreement. Could you kindly share it, please?

        Thank!

  • Rajen

    hi Leonard,
    Am a bit of a novice in this. Just totalled up the 10 million which you mentioned and it reaches to 9.8 if I am correct. Also you mention 10% of the 10 million to employees whereas the same totals upto 400K only. Am I missing something?

    Thnks for your help in advance

    • Duplicate out the lower positions at lower equity levels. You’ll probably need more employees…

  • Clara

    I still did not get it , this fuckin thing has never come up in my mind. I am trying hard to understand since 3 years still not going into my head that how the fuck is it diluted what the heckkkkkkkkk

  • Mike

    Confirm if im reading this correct. In your scenario, the founders own the balance of the issued shares? Example, 50 mill issued with 20 million outstanding. Founders own 30 million? So, 20% each?

    • Leonard Kim

      Yeah, but why would you issue out that many shares to the founders?

      Let’s look at it from a fundraising perspective.

      You set aside 10 million shares for everyone. You go to raise capital. A seed investor says I want 50%. Now you have 15 million shares issued. A series A says I want 50%. Now you have 22.5 million shares issued. Series B says I want 50%. Now you have 33.75 million shares issued. You go through Series C at 50%. You issued out all your shares. Now, let’s say you screw up. You need more funds. You have to go back and hire an attorney to redo all your paperwork so you can get more money, but you’re diluting everyone else. This costs you so many more headaches.

      If your situation, you issue 30 million. You do 1 seed round at 50%. You have 45 million shares issued. If you want to fundraise another round, you need to redo your paperwork and pay a ton in fees. Why keep redoing the fees when you can just only allocate 20% of that to the entire team and work off of 10 million shares of the 50 million pot?