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How to Assign and Document Equity for Founders in a Startup

Assigning Equity for Founders

This article provides guidance on when and where to assign equity for founders during the formation of a company.

When to Assign Equity

Equity for founders is typically assigned during the initial formation of the company. The specific timing depends on the type of business entity being established:

  • For an LLC: Equity is assigned after filing the articles of organization with the state. At this stage, it is essential to draft and sign an operating agreement. This document outlines the business structure, including ownership percentages, rights, and responsibilities of each member, effectively assigning equity to the founders.

  • For a C Corporation: Equity is assigned after filing the articles of incorporation. Following this, the post-incorporation setup includes issuing shares of stock to the founders. This process is documented through shareholder agreements, a cap table, and board resolutions, ensuring proper recordkeeping of ownership.

Where to Document Equity Assignments

It is crucial to formally document all equity assignments at the inception of the company to avoid disputes and meet regulatory requirements. The following documents are typically involved:

  • Operating Agreement (for LLCs): This agreement should detail the ownership structure and the rights and responsibilities of each member.

  • Shareholder Agreements (for C Corporations): These agreements outline the terms under which shares are issued to founders.

  • Cap Table: This is a record that shows the ownership stakes in the company, including the number of shares owned by each founder.

  • Board Resolutions: These are formal documents that record decisions made by the board regarding the issuance of shares and other equity-related matters.

Conclusion

Assigning equity for founders is a critical step in the formation of a company. It should be done promptly after the legal establishment of the business entity and documented thoroughly to ensure clarity and compliance with regulations. Proper documentation helps prevent future disputes and provides a clear record of ownership.