A Tutorial on Capitalization of a Startup Corporation

When you create your corporation and make it a legalallocated, with 45% (plus what ever stock you have
entity in the principal State of Business, Nevada, orissued to new employees since you raised the Angel
Delaware, one of the requirements is to CapitalizeFunding) being issued, giving you 5,000,000 shares
your company to give it value.available for you to barter with the Venture Capitalist.
What this means is to create a number of sharesYour goal is to give away no more than 20% of the
(stock) in the company and give it a "par value" (whichcompany for that $5,000,000 (2,000,000 shares). If you
may be no par value). You are taxed based on thisare able to do that, you have taken the value of the
value until you start making revenue, etc.company from $1.00/share to $2.50/share, making
We recommend that you Capitalize your company, atyour initial investors happy, their stock went up in value
start up at 10,000,000 shares, with a par value ofalready, and leaving room for future sales if need be.
$0.0001 or $0.00001 (depending on the State you areThe Venture Capital is probably going to come to you
incorporating in). This level of stock does a few thingsoffering you $5,000,000 for 51% of the company or
for you.more. In that you are coming to them from a position
First, it gives you a somewhat large pool of stock toof power (you still have money in the bank, and are
work with in issuing stock to key players, and in gettingable to work on the product), you should be able to get
Friends/Family and Angel Investors involved, and withthem down below the 50% level.
time, Venture Capitalist.Let us say you get them to invest the $5,000,000 at
Second, it allows for realistic prices per share growth20% (2,000,000 shares). The ownership of the
as each new person comes on board and buys stock.company is as follows, assuming no shares are issued
Let's break down a new company startup:to any other employees at this time:
The company is being created and started by a CEO,CTO = 2,000,000 shares/20% of the Capitalization of
CFO and CTO (three people), with the CTO being thethe company or 30.77% control of the company
predominate person behind the company and the CFOCEO = 750,000 shares/7.5% of the Capitalization of
and CEO are past business associates of the CTO.the company or 11.54% control of the company
CTO wants controlling interest in the company and theCFO = 750,000 shares/7.5% of the Capitalization of
other two both want equal shares to each other, givingthe company or 11.54% control of the company
the CTO control.Friends/Family/Angels = 1,000,000 shares/10% of the
10,000,000 shares at a par value of $0.0001 valuatesCapitalization of the company or 15.39% control of the
your company at a net worth of $1,000 for taxcompany.
purposes.Venture Capitalist = 2,000,000 shares/20% of the
The CTO takes 20% of the total value of theCapitalization of the company or 30.77% control of the
company, which is 2,000,000 shares. At this point, withcompany
no other shares being issued yet, the CTO owns 100%Often the concern of the Founder (CTO in this case)
controlling interest in the company. These shares canis that they will not have "ownership" of the company,
be issued on the basis of work done to date, start upand it looks like it here. In fact though, assuming that
cash put into opening the company for business, andthey have a good relationship with the Friends, Family
the release of IP to the company.and Executive Staff, they have control of the
The CEO and CFO each get 750,000 (or 7.5% of thecontrolling interest in the company by pooling the
company Capitalization each). At this point, the CTOshares of those loyal to them. (This of course
now owns 57.2% controlling interest in the company.assumes that what they want to do isn't against the
500,000 shares are put aside for bringing in newbest welfare of the company and stock holders and
employees. We have now allocated 40% of thethe stock holders agree with them. Remember, the
Capitalization of the company to be issued, and 35% is1,000,000 shares in the Friends/Family/Angel round is
actually issued.typically not in one person's hands, but several peoples
You now have 1,000,000 shares put aside for youhands.)
Friends/Family/Angel's. (Another 10% of the company,If your calculations were off mid way through the
taking the total allocated position to 50% of thespending of the $5,000,000 (and you still have about
Capitalization of the company.)$2,500,000 in the "bank") and you are going to need
It is felt by your Executive Team that you need toanother round of Venture Capital, you have 3,000,000
raise $1,500,000 in Friends/Family and Angel money toshares left over to raise capital with, potentially at $4.5
get the Proof of Concept completed and to get readyplus per share, again making everyone happy, and
to for your first (and if you listen to us, last) Venturereducing the amount of share that go out for each
Capital Round that will take you to revenue andround.
positive cash flow. You now go to your friends, family,Many companies do not follow this plan, but base their
pocket, Angels and offer them shares at a dollar perofferings based on "outstanding shares" versus
share. You sell 1,000,000 shares and have your moneyCapitalization of the company. Good Venture Capitalist
to get the product developed and proved.will be looking at total Capitalization and not
The DAY you close the last part of that money, you"outstanding shares" for their percentage of the
begin courting your Venture Capitalist for what youcompany.
feel will take you to cash positive revenue. Let us sayThis also assumes that only Common Stock will be
that will be $5,000,000.issued in the company, which is what we recommend,
You have 50% of the company Capitalization that isgiving equal rights to all shares.