17 Rules and Techniques of Share Split

The division of shares between partners is both a science and an art.

Especially people who have never been in business before or have just started. must have been trapped in this mistake.

The damage caused by the wrong share split ranges from disagreement to affect the relationship.

Until the business disappeared because the founders of the band split up.

Source : Netflix

I have had direct experience in this matter many times, as a consultant for many founders and many companies.

There are many cases of this conflict, so I would like to summarize the 20 iron rules regarding the stock split in case it helps reduce this problem.

1. Don't skimp on stocks If we want to grow, 

First of all, you have to change your mindset first.

Our company was newly established. It has no value because there are no customers, no products, no income.

But most people like to rationalize that they will succeed as a great company.

It may be in the future, but it is not yet.

So I was jealous of the stock, I didn't want to share it with anyone because I thought it had a high value and was afraid of losing my administrative power.

What can be useful? If we hold 100% of the Nothing company,

It is better to use it as a tool to create growth for the business.

A company that grows and succeeds is the founder of Use stocks as a tool to reward the right people in the right way.

Jeff Bezos, the founder of Amazon.com, currently owns only 9.7% of the shares.

Mark Zuckerberg owns 13% of the original Meta or Facebook shares.

Elon Musk also owns around 13% of Tesla's shares.

everyone They have the right and authority to make decisions from both the executive position and the board position.

In the United States There are different types of stocks that have different voting rights.

Although there are not so many stock options in Thailand, it can also be written as a mandatory condition in the Shareholders' agreement.

2. Who will have a stake in the company's success and should receive shares in return? 

such as

- Co-founders invest in business vision, ideas, and make them a reality.

- The first people who can provide capital for themselves are friends and family.

- Early employees who are willing to give up their time and knowledge and abilities to help small companies that do not know our future.

- Advisors, people who are there to guide and help. If the advice is really useful and really helps us, but we may not pay them because these people are expensive, we should find other ways to give back, such as giving them shares.

- Capitalists and investors who invest in our company.

- Partners who work to help each other and we want them to help us for a long time, such as technology partners who help develop programs, sales partners who are good at selling and dedicating resources to help sell things to us.

People with money and brains are visionary, good at selling things, a lot of friends, approaching talented people or with detailed people, good at being attentive, taking care of the backyard, taking care of talented people.

You have to figure out which qualities provide value to the company (value is calculated as value and weight).

Source : Netflix

3. The initial share ratio of each person to visualize the picture. Let's use the numbers that are the most commonly used best practices. 

- หุ้นพนักงาน (Employee stock option pool) Usually set aside at around 10-15%, not more than this.

- advisor Starting from 0.5-1%

• If you help us every month, add another 0.5%, if you have an extensive network that helps us a lot, add another 0.5%.
• The maximum that should be given to a consultant is 5% not more than this. If someone gives the consultant more than 5%, this is abnormal.
• Many co-founders have no experience in stock splits. Finding a consultant to ask for 10-20% of the shares is a very big mistake because the company must be driven by workers who give their lives. Not a person who gives advice, but not tired of working like us.

4. The Iron Rule Avoid Equal Splits 

For example, 50/50 - You, my friend, I love you, we share equally fairly.

It seems fair that there are successful cases, but most cases like this tend to break up later.

5. The disadvantage of the stock split is that no one can knock it. When I have a problem, I will get stuck in a loop because the sound is the same. Especially if the number of partners is even. There is a chance of problems. 

When Steve Jobs founded Apple with Steve Wozniak, the two of them shared an equal share of 45% and invited the third co-founder, Ron Wayne.

One of the reasons is that it is the judge. If Jobs and Woz quarreled or couldn't come to an agreement, they would not be able to do so.

If the case at the co-founder is equally important. Let's divide it with a majority, such as 51% and 49%.

6. The principle of the most appropriate share division in an equal and fair manner is to divide according to the value to the company. 

equal It does not mean that they are equal because each person will not give equal value to the company.

Values range from dedication, labor, investment, time, resources, knowledge, ability, experience, reputation, connections, anything that creates value for the company should be valued in all aspects. The weights vary.

Each factor is called "Contribution Multipliers".

Regardless of time, they will join sooner or later.

7. Role & Responsibility, for example, the main person who must drive the business is the co-founders. 

For example, the CEO may be a little more and deserves the most shares because he has to perform many duties that the company does not have people.

Startups, we often jokingly call the CEO the Chief Everything Officer who really does everything.

8. Dedication, or what we call contribution & commitment, is like a commitment to how much we will do. Do it full-time, or do it part-time, or after a full-time job, whatever. 

People who quit their full-time jobs to work for a full-time company are people who take very high risks. There is no security, the company will survive or not, I still can't answer. The more people have burdens and debts, the more risky their lives are.

Therefore, the stock division must reward those who sacrifice their stability in life to devote themselves to doing risky things.

9. Distance proves horses, time proves people. This statement has a profound meaning. Who is serious, what level, how dedicated they are, we have to look at it for a long time, we need a tool called Vesting to help. 

Although the co-founder may know each other intimately, be friends, and trust each other, but if they have never worked together before, they will not be able to work together. It is very necessary for each person You have to prove yourself to the other person.

Distance proves horses, time proves people, so it is very important for the success or failure of a business.

Doing Business The road is not easy, there may always be problems along the way. There are a lot of things to go through. Some people are discouraged, discouraged, tired, discouraged, some have to go to school, some get married and have families.

10. Vesting is the gradual giving of shares over time to incentivize the team or co-founder to stay for the company for a certain period of time before starting to earn shares (this period is called Cliff). 

Giving up shares Think of it as simple as paying shares in installments to the founders. I didn't give it to him once.

It must be clearly defined how many % of shares will be given in the first year until the specified year, and everyone who remains will get the full quota of shares.

Vesting is like a motivation to stay at work, and Cliff is like a proof of how much each person puts himself or herself in.

It's not like you get money, divide the money, divide the shares, finish it, and then disperse.

We have to prove and measure our hearts and minds who are willing to trade their future and time. Without rushing anywhere.

11. A mistake that is often missed a lot is the stock split. 

When the shares are divided. The people who carry on are the people who are still running the company, but many of my friends are no longer there. Unfairness will happen immediately.

12. Separation of ownership and return 

Most people tend to think that holding a proportional share, for example, 40%, will get a return of 40%.

Many times, it will cause problems that lead to a crack in the relationship between the co-founders, which can cause the team to break.

For example, if there is an income of 10 million in the company, which comes from our dedication more than another person. We should have gotten more, but coincidentally, we hold less shares.

At this point, we will hesitate about the next task. Should we still devote ourselves to earning money? Because it will sell a lot. The other person will always benefit more than us.

Some cases Partners have conflicts of interest, such as opening a company to take on their own work or taking part of the work out to do it themselves because they get a lot of benefits and may be the ones who do a lot. Why divide others?

This kind of thought will echo in your head from time to time if they feel that the reward for their work is not fair.

The advice is to talk separately into 2 parts. Stocks are ownership, decision-making power. and Incentive is the reward of a person who has completed a task. For example, whoever can sell it may get a bonus. Get commissions, get more remuneration.

Separating ownership from incentive.

This makes the shareholding small but may get more returns. Eliminate the problem of greed Create cracks.

13. The proportion of shares of capitalists or investors that is this much. How many shares should I get? 

To know the % of shares, you must have the company value or valuation in mind first.

An early-stage company does not know where to find value.

Financial projection is something that helps us see this clearly, even though 99% of the projection is purely candle riding, we have to think rationally. Like a beautiful world, keep your sweet dreams alone, look at them according to the real and worst conditions. I can't sell as badly as I thought.

In the end, you will get a number that is enough to tell how much money someone should get, how many shares should be earned.

14. Dynamic Equity Split to Solve the Problem of Inappropriate Shareholding Ratio As the company grows, 

For example, the first share split, the co-founder held 51%.

Investors hold 49%

This case often occurs because the capitalist, the owner of the money, thinks that when he started the company, he was not able to do so. Money is what makes this business start.

Therefore, they will call for a large proportion of shares. The bargaining power is high, and they can't do it without money.

But as the company grew, Expand the business from the very hard work of the Co-founders.

However, the proportion of shares remains the same. I almost died, I got as many shares as people who put money in.

This is also wrong. The company has grown. The reward should go to the person who can make it grow.

The co-founder will start to feel taken advantage of.

When you have this kind of thinking, you will start to lack motivation and look for something else that gives a good return.

The company will fall into a recession because the people who drive it are desperate.

Therefore, it is important to design good rewards and maintain fairness.

Capitalists must understand that it is not the same stock ownership forever.

However, the co-founder should have more ownership of the company (onwership) by selling back a certain number of shares. The price should be specified in the Shareholders' Agreement.

These shares can also be used to raise more capital. When the company is expanding and growing, or when the money runs out, there is no money to continue driving the business.

15. Cap Table creates clarity of shareholding ratio 

At each stage of the discussion of the interests of the share split, it must be transparent and verifiable. Explain and debate in principle.

Once the numbers have been allocated perfectly. We will have to make a shareholder table or Cap Table to make it clear how much shares each person will hold and when.

At this stage, you will be much more comfortable and ready to register a company to kick-off the business.

16. Do Cap Table Modeling to simulate the event When there is a change in the proportion of shareholding in the future. 

Shareholding can change in the future, such as raising more funds and selling shares of shareholders.

Normally, we do something called Cap Table Modeling to simulate a scenario that if you can raise funds, How much will the proportion of shares held by each person be reduced (dilute)? In each round of fundraising.

We will see more clearly that if someone is interested in investing in us, we will be able to invest in us. How will the picture of shareholding change?

17. รู้จัก Dilution Effect 

There are many people who are confused about this point, thinking simply, if there is a fundraising, it means increasing the company's capital. There are new shares to be sold to investors who have invested in new investments. The total number of shares has increased. Therefore, everyone's shareholding as a % will decrease because the divisor is increasing.

But the number of shares we hold is the same. constant

The number of shares increased, it was like a whole pie getting bigger.

Even though we have a decrease in shareholding, if the pie is bigger, it may be bigger than the original pie we have.

Ownership decreases, but our wealth may increase.

What you should know is that every time a new fund is raised, The proportion of shares held by everyone will be diluted. Some people want to maintain this proportion, but they also have to spend money to buy more new shares.

If the co-founder does not have money to buy new shares, The more rounds of fundraising, the more it will decrease, as Jeff Bezos, Mark Zuckerberg and Elon Musk have experienced.

Instead, we will get injected capital to manage the business to grow into a bigger pie than before.

The caveat from this is that each round of fundraising is raised. Try not to lose too much proportion.

If it is diluted so that the proportion of shares we hold is too small. The motivation will disappear, and the administrative power may change hands.

All of these are the 17 principles that you should know in the stock split.

Case Study on Stock Split #1: Facebook (or Meta)

Currently, Mark Zuckerberg holds about 13% of the shares, but why does he have the power to control the direction of the company?

The reason why this can be done is because: Facebook shares are divided into 3 types. Yes, it is.

1. Class A Shares -> 1 หุ้น 1 โหวต
2. Class B Shares -> 1 หุ้น มี extra vote = 10 โหวต
3. Class C Shares -> ไม่มีสิทธ์โหวต

Mark Zuckerberg holds the most Class B stocks.

Partners who sell to make a profit and put money in their pockets will be Class C shares that do not have any voting rights.

You can get both money and not lose power. Voice control in the executive board is also available.

It's the same method that Google uses and Mark Gacop came again.

Many people wonder if they have the right to have so many voices in control of the company. Why not hire a good CEO to work for you?

I will be comfortable and can do other things. While still having supreme power.

But because in the company's constitution, it is written:

Any day, if Mark is no longer in the position of CEO.

The Class B shares that you hold will be converted to Class A immediately.

Case Study on Stock Split #2 : Dropbox

The company's pre-IPO funding round has an operating value of $10 billion.

The largest group of shareholders is Sequoia Capital holding 23.2% and Accel Partner holding 5%.

Arash Ferdowski, co-founder, holds about 10% of the shares.

and Drew Houston, CEO + Co-Founder, holds 25.3%.

The structure and powers of Dropbox's shareholders are as follows:

DBX shares are divided into 2 classes: Class A and Class B.

1. Class A shares are shares that are sold on the stock exchange at the time of IPO.

2. Class B shares are held by founders Drew Houston and Arash Ferdowski, as well as major investors such as Sequoia Capital and Accel Partners.

The special thing is that Class B shares receive 10 times more voting rights than Class A shares (as in the case of Facebook).

It is a method by which the co-founder exercises the right to control the company.

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