Typical allocation of shares at formation

Startups often authorize 10 million shares at incorporation, a practice that helps streamline early-stage equity allocation. These shares are typically divided among founders, reserved for future employees, or left unissued for flexibility. In most cases, founders receive around 80% of the total authorized shares, distributed based on their agreed ownership percentages. For example, in a three-founder company, each might receive roughly 2.7 million shares, while around 1 million shares are reserved for an employee stock plan, and another million remain unissued.

Addressing potential founder deadlocks is also a priority. In cases where two founders each own 50% and are also directors, there’s a risk of deadlock if they disagree on a decision. To prevent this, it’s often recommended for one founder to own an additional share or for only one founder to be on the board, ensuring smoother decision-making and minimizing conflicts.

Companies may also allocate shares with future co-founders in mind. For example, if a sole founder expects to bring in a co-founder later, they might initially keep half of the shares unissued, allowing flexibility for later adjustments. This approach avoids the need for costly amendments to the company’s certificate of incorporation with the Delaware Secretary of State, which can become time-consuming.

Unissued shares serve multiple strategic purposes. By keeping some shares unallocated, startups can later use them for employee incentive plans, advisor stock options, or even partnerships with accelerators. Having these shares available without exceeding the 10-million-share threshold also helps manage Delaware franchise taxes, which increase with unissued shares in certain cases. Issuing only a portion of authorized shares while leaving the rest unissued can make this tax structure more manageable.

Another frequent question concerns how unissued shares impact founder ownership. Initially, a company’s ownership percentages are based solely on the issued shares, meaning unissued shares don’t dilute any founder's stake. For instance, if a startup issues 4 million shares to each of two founders (from 10 million authorized), each founder holds 50% ownership, with unissued shares having no impact on this balance. This structure provides flexibility for future allocations without changing initial ownership percentages.

In sum, allocating shares thoughtfully at formation sets a foundation for balanced growth and flexible planning. Founders can avoid common pitfalls by maintaining a reserve for incentives, accommodating potential new co-founders, and preventing decision-making deadlocks. Consulting with legal or tax professionals during this process ensures alignment with strategic goals while maintaining compliance, helping early-stage companies position themselves for sustainable success.