What is the best way of allocating shares in my scenario?

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

24 August 2013 Dear All EXPERTS,

My situation is as follow:

I have started working as a freelance web developer and software developer in 2004 from my home. By 2006 I have got an office space, started hiring a few team mate. Now I have 6 employees working for me as a proprietorship firm.

My turnover is around 50-60 lacs in the last fiscal year. I pay around Rs.10,000 per month as salary per team mate. Our team have been existing for the last 2-3 years.

Now I am planning to form as a private limited company with an authorized capital of Rs. 50 Lacs.

And I'll have a new investor who will invest Rs. 20 lacs in my company.

My business target for the next 1 year is around Rs. 2 crores in gross turnover with Rs. 70-80 lacs profit before tax.

I also want to provide shares to all my 6 team mates.

So, in the present scenario I want to know what is the best suggestion for allocating shares among Me, Investor and 6 Team Mates.

Any suggestion and inputs are highly appreciated.

Thank you in advance for your valuable time.

Mr. Kumar

CA Kintal Shah

CA Kintal Shah (Expert)
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15 September 2013 its better to hire Consultant for this.

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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03 August 2025 Hey Mr. Kumar! Congrats on your growth and plans to form a private limited company. Here’s a thoughtful way to approach share allocation in your scenario:

Your situation recap:
Proprietorship with 6 employees

Turnover ~₹50-60 Lacs, aiming ₹2 Cr next year

New investor coming in with ₹20 Lacs investment

Authorized capital: ₹50 Lacs

Want to allocate shares to yourself, investor, and 6 teammates

Key points to consider before allocating shares:
Investor’s stake should be based on the investment amount relative to company valuation.

Founder's shareholding (yourself) usually remains majority initially.

Employee shares should incentivize and retain talent — often via an ESOP (Employee Stock Option Plan) or direct share allocation.

Consider vesting schedules for employee shares to ensure long-term commitment.

Reserve a portion of shares for future fundraising or key hires.

Step 1: Decide the valuation and share price
Authorized Capital = ₹50 Lacs (say divided into 5,00,000 shares @ ₹10 each)

You expect an investor to put ₹20 Lacs — this suggests company valuation of roughly ₹50 Lacs (if investor takes 40%) or based on your negotiations.

For example, if investor gets 40% for ₹20 Lacs, post-money valuation = ₹50 Lacs.

Step 2: Allocate shares based on investment and roles
Stakeholder Suggested % of shares Number of shares (₹10 face value)
You (Founder) 50% 2,50,000
Investor 40% 2,00,000
Employees (6) 10% 50,000 (divided among 6)

You keep majority control with 50%

Investor gets 40%

Employees get 10% collectively (around 8,333 shares each)

If 10% feels low or high, adjust based on how much equity you want to share and motivate employees.

Step 3: Use ESOP or Direct Share Allocation?
For employees, an ESOP pool is recommended:

Employees get options that vest over 3-4 years.

Helps retain talent.

Avoids immediate dilution.

Alternatively, you can issue shares directly, but ESOP is more flexible.

Step 4: Vesting & Lock-in
Set vesting schedules (e.g., 4 years with 1-year cliff) for employee shares.

This prevents employees leaving early with full equity.

Step 5: Future considerations
Keep some shares reserved for future investors or team expansion.

Discuss terms with investor on valuation and shareholder rights.

Summary:
Shareholder % Shareholding Shares (₹10 face value) Notes
Founder 50% 2,50,000 Majority control
Investor 40% 2,00,000 Based on ₹20 Lacs investment
Employees 10% 50,000 Via ESOP pool, vested over time

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