How does a startup typically allocate equity ownership to a new co-founder?


When a new co-founder joins a startup, the typical method for allocating equity ownership amongst the co-founders is generally to issue whatever number of shares is necessary to achieve the desired ownership levels. Principally for tax and accounting reasons, it is generally uncommon to reallocate shares that have already been issued to an earlier co-founder.

Naturally, there may be exceptions to this general practice. Consult an attorney if you have questions about your specific circumstances.

Examples

Scenario 1

At formation, startup Acme Co.:

  1. Authorizes 10,000,000 shares of common stock in its certificate of incorporation
  2. Issues 4,000,000 shares to Founder Alice so that Founder Alice owns 100% of the issued shares (i.e., 4,000,000 shares / 4,000,000 total issued shares)

Thereafter, Acme Co. recruits Founder Bob to join Acme Co. as its second founder. All parties agree that the ownership of Acme Co. after Founder Bob joins will adjust as follows:

  1. Founder Alice's ownership percentage will decrease from 100% to 50%
  2. Founder Bob's ownership percentage will increase from 0% to 50%

When Founder Bob joins the startup, Acme Co.:

  • Issues 4,000,000 shares to Founder Bob

Consequently, the resulting ownership of Acme Co. is:

  • Founder Alice owns 4,000,000 shares, resulting in an ownership percentage of 50% (i.e., 4,000,000 shares / 8,000,000 total issued shares)
  • Founder Bob owns 4,000,000 shares, resulting in an ownership percentage of 50%

Scenario 2

At formation, startup Acme Co.:

  • Authorizes 10,000,000 shares of common stock in its certificate of incorporation
  • Issues 8,000,000 shares to Founder Alice so that Founder Alice owns 100% of the issued shares (i.e., 8,000,000 shares / 8,000,000 total issued shares)

Thereafter, Acme Co. recruits Founder Bob to join Acme Co. as its second founder. All parties agree that the ownership of Acme Co. after Founder Bob joins will adjust as follows:

  1. Founder Alice's ownership percentage will decrease from 100% to 50%
  2. Founder Bob's ownership percentage will increase from 0% to 50%

Because Acme Co. already issued Founder Alice 8,000,000 of the shares authorized in its certificate of incorporation, there are only 2,000,000 shares remaining available for issuance, which is not enough shares to achieve the desired ownership levels. Thus, Acme Co. must first authorize an additional 6,000,000 shares by filing with the Delaware Secretary of State an amendment of its certificate of incorporation. Once the amendment is filed by the Delaware Secretary of State, the startup has a total of 16,000,000 shares authorized, of which 8,000,000 shares are available for issuance.

When Founder Bob joins the startup, Acme Co.:

  • Issues 8,000,000 shares to Founder Bob

Consequently, the resulting ownership of Acme Co. is:

  • Founder Alice owns 8,000,000 shares, resulting in an ownership percentage of 50% (i.e., 8,000,000 shares / 16,000,000 total issued shares)
  • Founder Bob owns 8,000,000 shares, resulting in an ownership percentage of 50%

Scenario 3

At formation, startup Acme Co.:

  1. Authorizes 10,000,000 shares of common stock in its certificate of incorporation
  2. Issues 4,000,000 shares to Founder Alice so that Founder Alice owns 40% of the issued shares (i.e., 4,000,000 shares / 10,000,000 total issued shares)
  3. Issues 4,000,000 shares to Founder Bob so that Founder Bob owns 40% of the issued shares
  4. Issues 2,000,000 shares to Founder Carol so that Founder Carol owns 20% of the issued shares

Thereafter, Acme Co. recruits Founder Dan to join Acme Co. as its fourth founder. All parties agree that the ownership of Acme Co. after Founder Bob joins will adjust as follows:

  1. Founder Alice's ownership percentage will remain unchanged at 40%
  2. Founder Bob's ownership percentage will decrease from 40% to 30%
  3. Founder Carol's ownership percentage will increase from 20% to 25%
  4. Founder Dan's ownership percentage will increase from 0% to 5%

Because Acme Co. already issued Founder Alice, Founder Bob and Founder Carol all 10,000,000 of the shares authorized in its certificate of incorporation, there are no shares remaining available for issuance. Thus, Acme Co. must first authorize an additional 3,333,334 shares by filing with the Delaware Secretary of State an amendment of its certificate of incorporation. Once the amendment is filed by the Delaware Secretary of State, the company has a total of 13,333,334 shares authorized, of which 3,333,334 shares are available for issuance.

When Founder Dan joins the startup, Acme Co.:

  1. Issues 1,333,334 additional shares to Founder Alice
  2. Issues no additional shares to Founder Bob
  3. Issues 1,333,334 additional shares to Founder Carol
  4. Issues 666,666 shares to Founder Dan

Consequently, the resulting ownership of Acme Co. is:

  • Founder Alice owns 5,333,334 shares, resulting in an ownership percentage of 40% (i.e., 5,333,334 shares / 13,333,334 total issued shares)
  • Founder Bob owns 4,000,000 shares, resulting in an ownership percentage of 30%
  • Founder Carol owns 3,333,334 shares, resulting in an ownership percentage of 25%
  • Founder Dan owns 666,666 shares, resulting in an ownership percentage of 5%