Legal Definitions - founder's share

A founder's share is a specific type of ownership stake in a company, historically issued to the individual or individuals who established the business. These shares were given as part of the compensation for their initial efforts, ideas, and assets contributed to get the company off the ground. A key characteristic of founder's shares is their specific arrangement for profit distribution: they only receive a share of the company's profits (dividends) after a predetermined amount has already been paid out to holders of ordinary shares. This means they have a lower priority when it comes to receiving dividends. While once common, particularly in England, this type of share is now rarely used.

• Example 1: Startup with Investor Priority

  Imagine Dr. Anya, a brilliant scientist, invents a revolutionary new medical device. She decides to form "MediTech Innovations Ltd." to commercialize it. To attract initial investment, she issues ordinary shares to early investors who provide crucial capital. As compensation for her intellectual property, her tireless initial work, and the risk she took, Dr. Anya receives founder's shares. The agreement stipulates that her founder's shares will only receive dividends once the ordinary shareholders have received a 5% return on their investment each year. This arrangement ensures that the investors who provided the initial cash flow are prioritized for returns, while Dr. Anya is rewarded for her foundational contribution once the company achieves a certain level of profitability.

• Example 2: Established Business Transition

  Consider "Heritage Booksellers," a long-standing independent bookstore founded by Mr. Davies. As he approaches retirement, Mr. Davies sells a majority stake in the business to a younger entrepreneur, Ms. Chen, who brings new capital and modern business strategies. As part of the deal, Mr. Davies retains a small number of founder's shares. The terms specify that these shares will only pay dividends to Mr. Davies if the profits distributed to Ms. Chen and other ordinary shareholders exceed a certain threshold, ensuring that the new management's investment and efforts are rewarded first before Mr. Davies receives his residual share of the profits.

• Example 3: Technology Venture Compensation

  Sarah and Tom co-founded "Quantum Leap Software," a tech startup. Sarah developed the core algorithm, while Tom secured the initial seed funding. To acknowledge Sarah's foundational intellectual contribution without immediately diluting the returns for Tom and other early financial backers, Sarah was issued founder's shares. These shares were structured such that they would only participate in dividend payouts after the ordinary shares, held by Tom and other investors, had received a minimum annual dividend of 7%. This incentivized the financial investors by giving them priority, while still recognizing Sarah's critical role in creating the company's core product.