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At Sprintlaw, we work with a wide array of startups and small businesses navigating the ever-evolving legal landscape in 2025. A common question we receive is, “How can we allocate shares in our startup?”
We often discuss issuing shares in the context of more established companies. However, when you’re just starting out, determining a fair share allocation can be a bit tricky, as your company may not yet have been thoroughly valued. This early framework is crucial for attracting future investment and ensuring a flexible equity structure.
Let’s walk through share allocation in startups and discuss some ways you can potentially overcome this initial bump in the road.
How Do Shares Work In A Startup?
In any company, shares represent fractional ownership. When someone purchases shares and becomes a shareholder, they own a percentage of the company. Their rights, obligations and decision-making power are all set out in the company’s Shareholders Agreement.
In a startup, shares are typically divided between the founders and any early investors. The total number of shares and the share price need to be determined early on – it is common for companies to authorise 10,000,000 or more shares of common stock, as this large, divisible number provides flexibility for future allocations.
The initial allocation is often based on estimates, as there is no precise method to assess each contributor’s value at such an early stage. Factors such as risk taken, time commitment, and the expertise contributed will all influence the final distribution.
In 2025, many startups complement traditional assessments by also considering performance milestones and vesting schedules. Founders who assume greater personal risk and contribute extensively may justifiably be allocated a higher percentage of shares compared to those with a more limited role. For extra insights on structuring your founding team’s equity, our piece on startup founder contracts is a useful resource.
Allocation Of Shares In A Limited Company
We’ve discussed how shares work in companies generally, but the approach can differ depending on whether a company is public or private. In a publicly listed company, external investors purchase shares on the open market – for instance, through the London Stock Exchange. However, private limited companies operate under different constraints.
Private limited companies in the UK are subject to restrictions, typically having no more than 50 shareholders, with share distribution determined by internal agreements. It’s essential to tailor your share allocation strategy to meet these specific legal requirements and business goals.
How To Allocate Shares In A Private Limited Company
Allocating shares in a private limited company is somewhat different from public companies. Here, the company restricts its shareholder base, and shares are distributed among these limited parties according to pre-agreed arrangements.
Typically, shareholders sign a Shareholders Agreement that outlines the rules about what shareholders can and cannot do. For example, this agreement may specify a procedure for offering a departing shareholder’s shares to existing members before allowing an external sale. This not only maintains control within the company but can also protect the established business culture.
If the company’s agreement permits an external sale – or if no current shareholder wishes to purchase the departing member’s shares – the company can seek an external buyer. Once the transaction is completed, the shares are formally transferred to the new shareholder.
Do Founders Have To Pay For Shares?
Yes, founders are expected to pay for their own shares. Founders’ shares are typically acquired at a discounted rate in recognition of the greater risk involved, as they invest their time, expertise and capital during the company’s nascent stages.
Depending on the agreement between founders, these shares may come with different terms compared to common shares. For instance, founders’ shares might be issued as a separate class, providing the founding team with enhanced voting rights or greater control over strategic decisions.
Such arrangements are often outlined in a Founders Term Sheet – a document that serves as a preliminary agreement leading to a fully legally binding contract once the company matures.
How Many Shares Do I Issue To Founders?
There is no universally fixed number of shares that founders should receive, as this depends on your company’s unique circumstances and the agreement reached among the founders. Typically, founders who contribute more substantially – whether through capital, intellectual property, or continuous efforts – may justify a higher allocation compared to others with lower-risk contributions.
If you’re uncertain about the optimal allocation, it might be wise to consult a professional. Each startup is unique, and ensuring the share split reflects both past contributions and future value is critical to avoiding disputes later on.
Do I Allocate Shares Based On Ownership Amount?
Ownership percentage primarily applies to investors who contribute capital in exchange for a share of the company’s equity. The amount invested, coupled with the current valuation, determines the proportionate stake they receive.
This allocation is typically made from the pool of unassigned shares that remains after founders’ allocations have been made. The precise number of shares an investor receives will depend on both the capital invested and the prevailing share price, ensuring fair dilution for all parties involved. For further insights, our guide on the legal aspects of starting a small business offers additional detail.
How To Distribute Equity In A Startup
Equity represents an individual’s or organisation’s ownership in a company and is typically managed through vesting schedules. Such schedules ensure that key contributors—founders, investors, and even employees through option pools—earn their equity over time, thereby aligning long-term interests with company performance.
The amount of equity distributed is rarely equal for all parties and instead is carefully calibrated based on each party’s overall contribution and risk. For more information on structuring equity and mitigating dilution, you might find our article on startup founder contracts useful.
In 2025, modern startups frequently utilise digital cap table management systems to ensure transparency and accuracy in equity distribution. These platforms not only simplify the process of tracking share allocations and vesting schedules but also help in complying with updated regulatory requirements. Regular reviews of your equity structure as your business grows can help ensure that the share and equity allocations continue to reflect each contributor’s ongoing value.
Key Takeaways
Allocating shares in a startup differs significantly from share distribution in more mature companies. Here are the key considerations for modern startups in 2025:
- Shares in a startup are based on estimations due to the nascent stage of valuation.
- Private companies restrict share allocation to a limited number of shareholders, as outlined in a Shareholders Agreement.
- Founders must purchase their shares at discounted rates, with allocations reflecting their level of involvement and risk.
- Investors receive shares proportional to the capital they inject, determined by the company’s valuation.
- Equity is distributed via vesting schedules that reward long-term commitment and performance.
- Holding shares through a trust is generally popular for its security and tax advantages.
- Modern equity management tools can help maintain transparency as your company grows.
It’s always wise to seek the advice of a legal professional before finalising your share allocation strategy. If you would like a consultation on allocating shares for your startup, please get in touch with us at 1800 730 617 or [email protected] for a free, no-obligations chat.
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