How many shares should I issue?
This is the eternal question. What is the best number of shares to issue when I am setting up a company.
In a genuine capital raising where you have arms length investors the answer is quite simple. You issue as many shares as the company needs to issue in order to raise the necessary capital. So if the company needs to raise one million dollars you would issue one million shares.
But what of simple family companies that don’t need capital?
In this situation you do not normally need any capital injected into the business and the allotment of shares is on a percentage of ownership basis. For a sole shareholder company it is quite common to only issue one share.
But what if you want to bring in another shareholder in the future? Say your sole shareholder wants to sell half his or her shares to a new partner. To complete this you would first need to do a share split so that the shareholder then had two shares and he or she could then sell one of them to the new partner. But then you might want a third partner in the future and would have to go through the same painstaking process.
Because of this we recommend that people allot 120 shares in the first instance when setting up a new company. The number 120 is perfectly divisible by two, three, four, five, six, ten, twelve and twenty. So, if you have a company with 120 allotted shares and you want to bring in new shareholders it is much easier as you can simply sell a percentage of the issued shares.
Take the previous example where there was one shareholder with one issued share. If that shareholder had 120 shares and wanted to sell half his shares then he merely sells 60 of them to the new shareholder. The company now has two shareholders with 60 shares each. Then if the two shareholders want to bring in a new third shareholder they can simply both sell 20 of their shares each to the new shareholder and then you have three shareholders with 40 shares each.
You can even go one more step and bring in a fourth shareholder by each of the three shareholders selling 10 shares to the fourth shareholder. And then by each of the four shareholders selling six shares to a fifth shareholder you have a company with five shareholders with 24 shares each.
Want to go to six shareholders? Then simply get the five shareholders to sell 4 shares each to the sixth shareholder and you have six shareholders with 20 shares each.
You would actually have to go to seven equal shareholders before you would need to consider a capital restructure.
So as you can see, by initially allotting 120 shares you have a share structure that offers great flexibility without the need for a capital restructure.