Issuing Shares to a Consultant or Co-Founder
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP. and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
As a founder, it is common to have questions about how equity works when bringing on other people, such as consultants or co-founders. One question that is often asked is whether a founder is giving away some of their shares when they issue equity to a new team member.
The answer to this question is generally no. Instead of transferring equity from the founder to another person, it is important that the corporation has authorized enough stock to issue to the new person in exchange for cash. The cash goes into the company, and the shares are registered in the name of the company. This makes the new person a shareholder. (Read more about why it’s important to pay for shares).
Alternatively, the corporation can issue options or other types of equity awards to the new person. It is important to note that when the corporation issues these awards, it is using authorized but unissued stock. It is crucial to make sure that the company has enough of this new stock authorized to give to people, as issuing too much stock can lead to an over issuance problem.
In summary, when bringing on other people to the company, it is important to make sure that the corporation has authorized enough stock to issue to them in exchange for cash or other consideration. This will ensure that the company does not run into problems with over issuance, and will set the company up for success when seeking funding from angel and venture capital investors in the future.
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP. and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
As a founder, it is common to have questions about how equity works when bringing on other people, such as consultants or co-founders. One question that is often asked is whether a founder is giving away some of their shares when they issue equity to a new team member.
The answer to this question is generally no. Instead of transferring equity from the founder to another person, it is important that the corporation has authorized enough stock to issue to the new person in exchange for cash. The cash goes into the company, and the shares are registered in the name of the company. This makes the new person a shareholder. (Read more about why it’s important to pay for shares).
Alternatively, the corporation can issue options or other types of equity awards to the new person. It is important to note that when the corporation issues these awards, it is using authorized but unissued stock. It is crucial to make sure that the company has enough of this new stock authorized to give to people, as issuing too much stock can lead to an over issuance problem.
In summary, when bringing on other people to the company, it is important to make sure that the corporation has authorized enough stock to issue to them in exchange for cash or other consideration. This will ensure that the company does not run into problems with over issuance, and will set the company up for success when seeking funding from angel and venture capital investors in the future.
