Percentage of share ownership for each founder

Early on in a startup’s life, the founders should document the percentage that each founder owns in the business.  Assuming the startup is a corporation, documenting how much each founder owns means the corporation needs to issue shares after incorporation to each founder. You would be surprised how many startups in Ontario do not document how much each founder owns!

Missing the step of documenting share ownership in a best-case scenario can be fixed and may only slow growth momentarily. For example, funding may be put on hold while a minute book is properly prepared. However, the worst-case scenarios for forgetting to document share ownership are hard to fix. There could be tax issues involved if the company has increased in value and is issuing shares well past the date of incorporation. Forgetting to document share ownership can also cause shareholder disputes that cannot be resolved.

For example, let’s say share ownership is not documented or talked about and there are three founders of the startup. Two of the founders have always done the majority of the work, with the third founder contributing to a lesser extent.  A year down the road when the founders now try to issue the shares, what if the third founder claims that they always believed they owned a third of the business? Without a paper trail, it might be hard for the two other founders to refute that claim.

If you are a startup corporation in the process of issuing shares, keep in mind that there are a few mistakes that can be made. In Start-up and Growth Companies in Canada 2^nd Edition written by the lawyer Bryce Tingle, he points out a number of mistakes startups can make when issuing shares.  One common mistake Bryce points out is for the startup to give every founder the same number of shares. While startups are known for being more flat and egalitarian than a standard owner-operator small business in Ontario, giving everyone the same amount of shares can lead to a number of problems.

The main problem is that startups are a stressful, fast-moving environment where decisions need to be made. Constant impasses aren’t going to get a startup anywhere.  One founder needs to take the lead with the enterprise and be issued more shares than everyone else to account for their added responsibility. Another problem with equal share ownership is that too many shares may be issued to someone who may end up only having a minor role in the corporation (if any role at all). Startups need to put in a lot of thought into the share percentage that each founder gets, and for the above reasons it would be best for the founders to not be issued shares equally.