You incorporated a business, but you did not have priced round yet. How will final ownership vary with initial investments, licenses and other equity agreement, until the first valuation?

When you incorporate a C-Corp in Delaware, you typically issue 1 million share per founder, you sign an 83b election so that you won’t pay taxes when your shares will be worth millions of $$$. That’s a great start!

However, until you raise a formal round, you will not put a price on shares, but defer this to the first formal valuation. Hence, you will typically use the following

agreements are for people believing in you, so that they give you money in exchange of future shares, in such a way these shares will be worth (100%/(100%-discount)) what they gave you.

agreements are for advisors who are going to work high-level for you, in exchange of future shares, agreed as a future percentage of equity.

License agreements enable organizations like Universities to obtain a fixed percentage of ownership in exchange of you using their technology.

Share issuance are for new co-founders.

In every case, percentage ownership (equity) is nothing less than the number of shares someone has, divided by the total number of issued shares.

Hey, how do you relate percentage of ownership to shares?

Wait, but if you commit to percentages of ownership, and you can only issue shares, how can you satisfy everyone? Must this be horribly complicated, left to math attorneys who do their job?!

It turns out, it’s just middle school math.

For example, let’s assume that you have three people,

Advisor A

,

Business angel B

and

College university C

. You agree with them on a fraction of equity for each:

%A =

0.002

,

%B =

0.012

,

%C =

0.04

(let’s assume it’s constant for now).

If you write

SI =

2000000

is be the number of initial founders shares - you can modify it.

SA

is the expected number of shares for

Advisor A

SB

is the expected number of shares for Business angel B, and

SC

the expected number of shares for College university C

Then you have the following math problem to solve:

We rounded up, since we cannot give a fractional number of shares. So the final fractions of ownership are:

%A =

0.20003159999999998%

%B

=

1.20000038%

%C =

4.0000170299999995%

Founders =

SI

/

TOTAL_SHARES

=

94.59%

And how does that work, if we agree on a SAFE ? Well, in this case, the percentage depends on the valuation of the business, the contract and the money they put in, so we can compute it independently of the final shares issues to other people.

That’s nice, how do I compute these for my amazing startup?

and use this as a template to add founders, advisors, license agreements and business angels, and you’ll see a nice capitalization table whose result is summarized here:

My Business Inc Ownership

My Business Inc Ownership

1

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