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Ownership Shares and Your Business Plan

October 20, 2021
By Elizabeth Choice

Ownership shares are a type of share that gives the shareholder rights to the company’s assets and profits. They can be issued in many different forms, including common stock, preferred stock, and limited liability company stock.

Ownership shares are the percentage of a company that an individual owns. This can be used to determine how much profit the owner will make on their investments, as well as how much they have invested in the company. Read more in detail here: what is a share of ownership in a company.

Tim Berry’s contribution

At many critical stages in most company plans, especially start-up business plans, shares must be addressed. Shares are ownership shares. This is why we speak about stock shares and purchase and sell stock on the stock exchange.

Because no one is sharing anything, even the smallest one-person company no longer need shares. However, if there is a second person present, sharing is an option. Corporations, which are usually held by shareholders and each shareholder has a certain number of shares, are a step above simple partnerships.

I’m not sure how many shares I should hold.
Is there a limit to how many shares I can have?
How many shares should I offer to my sister-in-law, who was instrumental in the development of the plan?
What about my roommate’s shares, which she claims was her idea?
What do you think the investors will think?

As you create a company strategy, questions regarding shares and sharing may arise often. I’d want to assist you in answering these kinds of queries by going over some basic share ideas that belong in a startup company plan.

As previously stated, when we speak about shares, we are referring to stock in the company’s ownership. The arithmetic behind share ownership is straightforward. The value of each share is calculated by dividing the company’s overall value or worth by the number of shares. For example, if a business has 1,000 shares and its value is $50,000, each share is worth $50.00. This is shown in the table below. C15, Price per Share, is the result of multiplying the company’s valuation, C14, by the number of existing shares, C13:

You can also use shares to determine the company’s value (known as “valuation”) by multiplying the number of shares by the share price. For instance, suppose you decide to issue 100 additional shares of your $50,000 business and sell them to Aunt Mabel for $5 apiece. Take a look at the following diagram, which shows a computation. The product of Shares multiplied by the Price per Share (C13*C15) is the value in cell C14:

This basic arithmetic may have an unanticipated impact on your company goals. By altering the price per share of stock, you’ve simply altered the worth of the whole business. You may have chosen to sell to Aunt Mabel for $5.00 per share just because you like her, but you have altered the company’s official worth. Analysts and tax officials, in general, have little or no sense of humour when it comes to stock transactions.

There are fine details that lawyers and CPAs could add – and I’m neither – but the value or worth of anything is decided for many legal reasons by what it was last purchased and sold for. As a result, this business is now worth $5.00 per share in our scenario. Do you think you undervalued it? That’s a pity. Given the circumstances, it would have been a better idea to give Aunt Mabel 100 of your own shares as a gift rather than sell them.

An important thing to note here is that nobody really minds how many shares a startup business has, at least not in isolation. This identical 1,000-share example business might have easily had 10 shares at $5,000 each or 100,000 shares at $0.50 each. The value of a business is determined by the price multiplied by the total number of shares.

What matters much more is how much of the business each individual owner owns. Aunt Mabel owns approximately 9% (100/1100=.090909) when she receives the 100 shares in the scenario above.

Table of Contents

Defining the Ownership of the Founders

The stock ownership of the founders should be clearly defined in a start-up company plan including more than one person. You must determine who owns how many shares and why, whether there are 100 or ten million. This is distinct from share sales to future investors, workers, or stock market purchasers if the company becomes publicly listed.

This isn’t about the figures in financial tables or the financials itself. In a typical company plan, the entire amounts invested will be represented by a single figure termed “paid-in capital.” Of course, percentages and ownership are very important. It’s important for your planning, but this ownership definition belongs in the plan’s text.

What do you think is reasonable? As if there were some formulae documented someplace, I receive a lot of inquiries on stock fairness. Because the number of potential variants is infinite, there are no standard formulae. As an example, consider the following:

“It’s her idea, but I’m paying for it, and he’s the only one who works there every day.” What is a reasonable ownership split?”

In this case, I’m not sure what’s fair. But I can tell you this: whatever you decide between yourself, it should be stated in your company strategy. Never, ever, ever, ever, ever, ever, ever, EVER, EVER, EVER, EVER, EVER, EVER, EVER, EVER Make sure that’s part of your strategy.

Despite the fact that there are no universal formulae, I can state that when it comes to justice, I place a high value on investment money. I appreciate sweat equity as well, but only when it is defined in terms of reasonable monetary worth.

Investors, Shares, and Valuation

You must grasp the underlying arithmetic if you intend to seek outside investors as part of your company strategy. Investors are interested in knowing how much money you want in exchange for how much ownership. Consider the following example, which should be included in every investment plan:

You can’t get away from the reality that asking $2.5 million for 60 percent ownership in your business implies you think it’s worth $4.1666 million. All of these principles are open to debate in the actual world. Investors seldom, if ever, trust an entrepreneur’s forecasts for future sales, value, investment size, or ownership percentage. You’ll need to back up your assumptions, and you’ll need to be ready to modify your strategy to reflect any investment commitments you make.

Is It Legal to Distribute Shares?

We can’t leave this topic without mentioning that selling stocks is almost always illegal. The Securities and Exchange Commission has a lot on the line in terms of preventing the sorts of frauds, Ponzi Schemes, and other schemes that were prevalent in the Roaring Twenties and afterwards. Companies spend a lot of money attempting to “go public,” or make it legal to sell shares to a large number of people. If you’re considering an IPO or public stock sales, start with the SEC’s website at www.sec.gov/answers/accred.htm, but consult an attorney before proceeding.

Ownership shares and your business plan are a big part of the success of any company. This article will teach you how to divide shares between 3 partners.