Starting a company – how many shares?
Small proprietary companies are the most common form of company used to operate a business in Australia. Such companies have shares on issue. When starting a business, the business will need a certain amount of money to get going (start up capital). The founder or founders can put this money in either as share capital or some as share capital and some as a loan, possibly with no interest accruing or at a commercial rate. Usually, this decision is taken with input from the business’ accountant. Typically, most companies are started with just a nominal amount of share capital. Often just one, two or a hundred shares are issued.
Is there an ideal number of shares to issue when starting a company?
Perhaps it may not seem important at the time, as there may only be one or two founders, so it can almost be any number (for two founders, who are 50/50, it just needs to be an even number).
In my experience, companies introduce new investors as shareholders or a company with a number of shareholders (akin to an incorporated partnership), shareholders come and go.
To give yourself flexibility going forward, I believe an ideal number of shares to start with is 60 (or a multiple of 60, such as 120). 60 is divisible by all of 1, 2, 3, 4, 5 and 6. So if a company starts with one shareholder who is issued 60 shares and later the founder wants to introduce 4 new investors, the founder can transfer 12 shares to each new investor (such that each person holds 12 shares).
Other good numbers of shares are:
- 420 (divisible by 1 to 6, and also 7);
- 840 (divisible by 1 to 7, and also 8);
- 2,520 (divisible by 1 to 8, and also (9 and 10).
If a company has more than one shareholder then a shareholders’ agreement is recommended, to govern such matters as:
- What decisions need unanimous approval;
- What happens if the directors can’t agree; how is a deadlock broken; and
- What is a fair process if one person wants to exit, or a majority want to sell the whole enterprise?