Lessons from Apple: Why Founders Should Split Their Stock

Recently Apple announced that they will be conducting a 4 way split of their stock.

This has two advantages:

1) It drives the number of shares up by 4x

2) It drives the price/share down by 75%

While the total size of Apple’s pie remains unchanged, they executed the stock split since investors (particularly retail) tend to prefer to own more shares that are cheaper.

This same effect may be able to help your company.

It’s expected that as a startup matures, founders will no longer discuss option grants as a percentage of fully diluted options (this creates issues, particularly with hires that are new to the startup ecosystem), but rather as a number of options and the $ value of those options.

If your price per share is high and total number is low you may want to consider a stock split.

For example, maybe you’re thinking about giving your next hire:

• 2,500 options with a price of $4

What if instead you conduct a 4-way stock split like Apple and could give them:

• 10,000 options with a price of $1

The net value is the same, but human physiology tends to be attracted to larger numbers of options.

Side note – the $ value of this option package should be the main focus of the conversation. Communicating in $ value gives an apples to apples comparison. If you are forced to pay your employees below-market salary the $ value of the option package offer, at today’s rate, should at least make up the difference. With a dose (hopefully a healthy one) of upside.

If you’re thinking about splitting your startup’s stock this is how it will be visualized in TWO12:

But is a stock split right for your company?

It depends.

Stock splits will incur legal, registration, tax, and potentially 409A impact.

Please be sure to consider the legal fees associated with such a split as well as tax implications prior to executing a stock split.

For example, Delaware charges fees based on either the Authorized Share Method (more shares -> + taxes) OR the Assumed Par Value Method.

“The tax that you eventually pay that state is based upon whichever method (authorized shares vs. assumed par value) comes up with the smaller amount. A large percentage of businesses under the assumed par value method, will simply owe the minimum tax under this calculation, or $350.00.”

Find us at https://two12.co or email us at hello@two12.co to sign up for a 14-day trial and start managing your most valuable resource, your startup’s equity, with precision.

PS > Did you know that this is Apple’s 5th stock split? If they never split after their IPO Apple stock would be worth $23,800 as of July 31st, 2020.