Share Allocation for a C-Corp: Insights for Founders and Investors

The allocation of shares in a C-corporation, especially for a startup with a large number of authorized shares, is a critical aspect that requires a deep understanding of corporate governance and financings. Let's explore a scenario pertain to a California C-corporation with a staggering 100 million shares at no par value and 10 million preferred shares. We'll delve into common practices for share distribution, option pools, and the intricate dynamics between founders and investors.

Founders' Shares at Inception

When a solo founder embarks on creating a venture-funded or tech startup, a common practice is to allocate between 5 to 10 million shares at the very beginning. This allocation is typically out of a pool of 10 to 12 million authorized shares. However, the governing board should adhere to legal advice from experienced corporate attorneys to ensure a smooth and compliant process. Not all founders, particularly those more focused on their technical skills, pay close attention to legal advice.

The Role of an Option Pool

The option pool plays a crucial role in the share allocation strategy. Typically, the option pool is not set up simultaneously with the initial share amounts. Instead, it's more common for the pool to be established when the company has around 5 to 10 rank and file employees and a significant first funding round. This strategic timing is crucial as it allows the company to grow organically before setting up the framework for future hires and financings.

Company Developments and Share Dynamics

As the company progresses, it's not unusual for the authorized shares to increase significantly. For instance, the company might have 100 million authorized shares, and by the time of the D round, the number of issued shares might exceed 40 million. During this phase, the C-corp might also hire C-level executives, grant shares to co-founders, and inevitably reassess the founder's equity stake.

Typically, by the time the company reaches the D round and faces substantial funding, the solo founder might own between 10 to 30 percent of the company, depending on their role and the equity terms negotiated with investors. In certain cases, if the founder is seen as a potential drain on the company's resources, they might be more likely to leave their CEO role in favor of a professional management team.

No Par Value: A Fundamental Consideration

While it might seem advantageous to have no par value for shares, it's actually a fundamental mistake in most cases. The lack of a par value is usually indicative of an outlier situation. Conventionally, par value is set at $0.0001 or $0.00001 per share. If a company opts for $0 as par value, it imposes certain conditions in Delaware law that can create complications. It's advisable to avoid this approach to prevent legal and financial complexities.

Cap Table Analysis: Beyond Simple Guesswork

To gain a comprehensive understanding of a company's capital structure, also known as a cap table, it's important to explore more detailed public sources rather than relying on guesswork based on the total share count. Cap tables provide insights into the ownership percentages, preference classes, and other critical information that investors and founders need to make informed decisions.

In conclusion, the share allocation for a C-corporation is a nuanced affair that requires careful planning and legal guidance. For founders and investors, understanding the dynamics and implications of share allocation is crucial for long-term success and compliance. By staying informed and consulting with experienced professionals, one can navigate the complexities of corporate governance and financing.