Allocating shares as an incentive at your startup
Updated: 8 December 2019
If you have decided to allocate shares in your startup, here are some tips.
How should you allocate shares in a company with more than 1 director?
One suggestion is to allocate an equal number of shares for each director for their equal contribution or a lesser amount for a lesser contribution.
For example, if you have 2 directors and each director is splitting financial and resources 50/50 and contributing a 38 hour work week, then you can allocate 50% of the shares to each director.
If you have 2 directors that are contributing different financial and time resources then you can adjust the share amount according to their respective contribution.
Contributions typically include labour and financial investments in the business.
If you have allocated shares to a director, a shareholder agreement is useful to outline shareholder rights and responsibilities.
In addition to allocating shares to directors, you may decide to allocate shares to employees.
Some good reasons include:
- to motivate your employees to contribute to the long term success of your business; and
- a tax efficient way of your employee’s acquiring shares.
You can allocate shares to employees through an employee share option plan.
Before you allocate shares this way, you could set a minimum time period before workers become eligible for the share plan.
Also, you can phase the share allocation.
Importantly, you should not look as a share plan as a way to get out of paying other employee entitlements.
Your employees have a right to be paid for their work and receive employee entitlements like leave and superannuation.
You may also allocate shares to an investor for their finance contribution.
Investors may give you what is sometimes called a term sheet or memorandum of understanding (MOU) that contains the key terms for their investment.
Next, a shareholder agreement usually follows.
While a term sheet or MOU are not usually legally binding, a shareholder agreement is so you should consider getting some legal advice at this stage.
We have an article called "4 tips for startups allocating shares to investors", you can read it here.
You may also decide to allocate shares to your business advisors.
In this case, an advisor agreement is beneficial because you can set clear expectations about the scope of the work to be delivered and the shares.
As in the case of employees, you may can set a minimum time period or criteria to be met before the advisor becomes eligible for the shares.
A lawyer can help you draft an advisor agreement.
5. Your other agreements
You may have obligations under other agreements like your company constitution, shareholder agreement or investor agreement. Your share allocation should not breach these or any other agreements.
If you need help, a business lawyer can help you review your legal documents.