How many shares should you have when you start your company?

Most Swedish companies are created with too few shares. It doesn’t cost anything to have more shares from the start, and it makes it easier to raise capital later. In this article we will explain what you should do.

A question we often get is how many shares a company should have when you start it. If you buy a ”shelf company” with a minimum share capital of 25,000 kr from a provider specializing in company creation, you often get 250 shares, unless you explicitly make a different choice. Is that a good choice? This depends on what you are going to use the company for. If this is a holding company with only one or two owners, where the ownership is not going to change, then it matters very little. But as soon as you have more than two owners or plan to raise capital, the question becomes important.

Problem one: how to divide the ownership?

Let us assume that there are three owners and the company has 250 shares. Since 250 is not evenly divisible by three, one of the owners will have one share more than the others, for example like this:

  • A: 84 shares
  • B: 83 shares
  • C: 83 shares

Certain decision in a company, for example changes to the articles of association and merger with other companies, requires a two third majority of the shares. In the case above, shareholder A can get a majority with either B or C, but B and C cannot get it together. That is, shareholder A gets a veto against decisions that require a qualified majority, but shareholders B and C do not.

You could solve this by having 252 shares, since 252 can be evenly divided buy 3. But then it is also important to increase the share capital by 200 kr to 25,200 kr. Otherwise, if you issue 252 shares, but stick with 25,000 kr in share capital, you will get a quota value (sharecapital per share) of 25,000/252 = 99.2063492063 kr, that is, it will contain 10 decimals. The problem is that the Swedish Company Registration Office, Bolagsverket, has an IT-system which only handles 6 decimals. For reasons that are rather technical, this means that it is likely that you will get errors when you issue shares in the future, and you will need to explain the problem every time to Bolagsverket.

Problem two: employee incentive programs

Let us say that the company employs a person who is offerred to buy 2.5% of the company. The problem now is that 2.5% of 250 is 6.25. Since you cannot issue fractional shares, it is not possible to do a share issue (or share sale) with the exact ownership that was intended. There is also a psychological aspect: it feels better to receive 62,500 shares than 6.25 shares, even if the actual percentage of the company would be the same.

Problem three: external capital

When a typical Swedish company raises external capital the first time, the valuation will often fall in the range of 5 to 50 million kr. With 250 shares, this means that each share will cost between 20,000 kr and 200,000 kr. This may not seem like a problem to begin with. But if the company is successful, it will become a problem. Let us take the payment company iZettle as an example. When the company was founded, it had 1,000 shares and at the first valuation round, it had a pre-money valuation of 40 million kr, meaning that each share was valued at 40,000 kr. But the valuation rose quickly, and at their share issue in 2015 they raised 565 million kr at a pre-money valuation of 3.5 billion kr. If they would have kept the same number of shares, each share would then have cost 855,490 kr, which would be inconvenient. It would also be problematic when issuing options to employees – a single option (corresponding to one share) would correspond to an ownership of 0.1 %. If all the employees in 2015 had received a single option, that would have diluted the company by 3.5%.

The solution to this problem is to divide the shares into more shares, in what is commonly called a ”split”. A split means that one old share becomes several new ones. If you do a split so that each old share becomes 1,000 new shares, you say that you do a split ”a thousand to one” or (1,000:1). This is precisely what iZettle did after its first share issue. That of course works, but it becomes harder to track how the valuation of the company develops, since you always have to take into account when the share was acquired. It becomes even harder if you do multiple splits. And this is precisely what iZettle did – some years after the first split, the company realized that they still had to few shares, and did another split, this time 20:1.

Solution: have many shares from the start

The solution to this problem is very simple: have lots of shares right from the start. For a normal Swedish company with a share capital of 25,000 kr this means that you should have a 2.5 million shares. This is the maximum number of shares you can get when you use the digital service Verksamt to start your company (if you send in the registration on paper, you could theoretically start such a company with 25 billion shares, but benefit of that is limited). If iZettled had followed this advice, they would have had a price per share of 146 kr after their final share issue (before they were acquired by Paypal), which would have been a reasonable price even at an IPO.

What do you do then if you already started the company with too few shares? Simple: do a split right away, and make it big enough so that you don’t have to redo it. Many companies choose to do as iZettle and do a first split which is ”big enough”, which in essence means that it is too small, and in turn requires yet another split. Therefore, you should go for a quota value of 0.01 kr right away.

Downside of having many shares

Are there any downsides to having that many shares? No. The only argument against is that ”this is not how you usually do it”. However, there are no rational arguments against having many shares.

Pro tip: if you use the StartupTools platform, it is easy to do a split. You can even do it at the same time as you issue shares or warrants. Try it out for yourself or book a demo.

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