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Stock Split 101 for Startups

Updated: Aug 8



When incorporating a company, we typically start with a small base of paid-up share

capital, since there is no minimum threshold for the same. However, a low paid-up share

capital results in a smaller pool of shares, and when investors invest in the company, their

shareholding is calculated based on the number of shares in the current paid-up share

capital.


For example, let’s say you start the company with a minimum capital of INR 10,000. This

could mean that you have 1000 shares in the company worth INR 10 each. Some time

down the line, you have an investor who wants to subscribe to 10% of the company’s

shares. This effectively means that the investor shall be subscribing to 100 shares (10%

of 1000). The two of you have come to an agreement for the transaction of 100 shares

for, let’s assume, $ 1 million or approximately INR 7,49,30,000. This exponentially raises

the value of each share to a whopping INR 7,49,300! From an investors perspective, this

may not matter, but you will begin feeling the pain when you create and start granting

ESOPs.


When creating and granting Employee Stock Ownership Plans (ESOPs), 1 ESOP converts

to 1 share. Therefore, in the aforementioned example, if 1 share is worth approximately

INR 7,49,300/-, then it becomes impossible to grant ESOPs to junior employees.

So what do you now? Do you wish you could turn back time and increase the paid-up share

capital of your company? Yes! Will that solve the issue at hand? No. This is where one

considers the splitting of shares or a ‘stock split’ or ‘stock divide’.


Splitting shares is much like splitting a pizza; no matter how many slices you cut, you

would still have only one pizza. By splitting shares, you increase the number of shares in

the company without causing a change in the total market capitalization of the company.

So with a 2-for-1 stock split, each stockholder receives an additional share for each share

held, but the value of each share is reduced by half. It would mean two shares now equal

the original value of one share before the split. Common stock splits are 2-for-1, 3-for-2

and 3-for-1.


In the example given above, you could split 1 share into 10 shares which will reduce the

value of each share to INR 74,930 and this would now allow you to grant ESOPs to your

employees.


Above is a cheat sheet to help you through the process of splitting shares!


*AoA = Articles of Association

RoC = Registrar of Companies

MoA = Memorandum of Association

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