Canadian startups are frequently influenced by U.S.-centric blog posts concerning startup company structure. Relying on these posts ignores some fundamental differences in how Federal and British Columbia corporations can be incorporated compared to a Delaware corporation. Indeed, Canadian startups should not ignore such differences as they permit a more lenient corporate structure from which to grow a company.
To start, here is an overview of the Delaware corporate structure typically recommended to startups:
- Authorize 10,000,000 shares. Delaware corporations must authorize a fixed number of shares at the time of incorporation. This number can be altered in the future but will require shareholder approval. The large number is used as: (a) it avoids fractional shares; and (b) looks expensive.
- Issue around 5,000,000 shares. Shares are issued to founders but at least a 1/3 of authorized shares remain unissued for option pool grants and investment rounds.
- Allocated shares to option pool. A certain number of shares are allocated to the option pool. The art of structuring the option pool, especially in regard to finance rounds, will be discussed in a future post.
Once complete, assuming a 10% pool, 6,000,000 shares (5m founder shares and 1m pool) have been issued or allocated. The remaining 4 million shares, or 40% of the company, will be reserved for future investment rounds and expansion of the option pool (if needed).
Conversely, Federal and British Columbia corporations are NOT required to authorize, and thereby set a cap on the number of, shares. Instead, shares can be unlimited, thereby granting the Canadian startup great leeway in granting shares in the future without having to worry about running into the authorized share limit that Delaware corporations face.
Here is what the same startup, incorporated Federally or in British Columbia, would look like structurally:
- Authorize an unlimited number of shares.
- Issue about 5,000,000 shares.
- Allocate the option pool, fixed or rolling. Given that shares are unlimited, you are not forced to set a fixed number of shares to constitute the option pool, although you could. Instead, you can set the option pool size as a rolling % of issued shares creating an automatically adjusting pool size regardless of the number of shares issued in the future.
Ultimately, the Federal/BC startup is not faced by the same rigid share structure, governed by the authorized share requirement, that a Delaware startup is, thereby taking away a few of the corporate structure challenges that U.S. startups often face. With unlimited shares, the Canadian startup’s future share grants are only restricted by the corporation’s constituting documents, agreements with shareholders or third parties and BC corporate law. Conversely, the Delaware corporation needs to review how a share grant will reconcile with the number of authorized shares and, if needed, increase that number and seek shareholder approval to do so.
Of course, if you want to structure the company exactly like a U.S. startup, you certainly can authorize a fixed number of shares in your Canadian startup!