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Share Allocation

Q1: How do I allocate shares in a start-up? [Katim Touray,]

A1: As a very strong believer in the virtues of employee ownership, I believe options provide the best vehicle for the entrepreneur to achieve the benefits that accrue when people have psychic ownership, without giving away too much too soon. It is very easy to give founder's stock out freely and can be a mistake --often your original team doesn't hold together. If you are in a true partnership with someone, however, you have to give more away earlier. Try to pay whatever is necessary to acquire the skills you need (including professional services), and use the options for inspiration and retention.

You can also use options to attract a high caliber advisory board and potential board of directors. Allocate hypothetical percentages of the shares to yourself, your future sources of finance, and to the hopefully expanding employee pool. (20% isn't too much for the employee pool and you can use some of this for 401k matching if you wish.), Issue options that vest over a multi-year period. [Esther Smith,]

A2: It is very difficult to build a successful company without offering each and every employee stock options. Work backwards to figure out the amount. You can architect your share allocation based on the amount of money you will need to raise to become cash flow positive. You will then be able to determine ownership based on expected dilution. [Mike Simon]

A3: A good lawyer is needed to help you do this right. A lawyer will help you step through this area and avoid major mistakes. Even small mistakes can become major and any mistake can cost you or somebody else a fortune. Get some good advice on how to properly create an option plan even if you think you know exactly what you want to do. [Jeff Bergman,]

A3: The "Small Business Answer Book", Jim Schell, Wiley, can answer many questions like this. [Hans Tallis,]

A4: The Foundation for Enterprise Development sponsors, which publishes an outstanding "Entrepreneurs Guide to Equity" for about $20. I recommend it for any small-business owner. The web site also has some very good material and pointers. [Hans Tallis, Hans]


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