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

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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)

15 September 2013 its better to hire Consultant for this.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

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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