Disproportionate distribution of shares in the company.

In my venture practice, I often encounter both startups and investors misunderstanding one nuance that sometimes becomes an obstacle to investing in startups.

The point is that many people believe that when an investor invests large sums of money in a startup, and the startup investor himself, of course, cannot invest comparable amounts, then at that moment the investor should automatically become the owner of a larger stake in the company.

This is the so-called proportional share distribution, when the shares of the company are distributed in direct proportion to the contributions of the founders. 

Let's assume that the startup's contribution in the form of a software product is estimated by the parties at KZT 10 mln, and the investor contributes KZT 90 mln in cash for the development of the project. In such a case, it is a priori assumed that the shares in the company will be distributed in proportion to the contributions, i.e. 90% should go to the investor and 10% to the founder. This is the usual default rule. If this rule always worked without exceptions, virtually all startup activity in the country would be halted. Naturally, investors usually invest more money than founders, and the result would be that all startup companies would be in the hands of investors, which would demotivate startups to work in such projects and attract investment in general. 

Fortunately, this is not the case. 

In fact, the legislation of the Republic of Kazakhstan allows the founders of an LLP to distribute shares in the authorized capital of the company disproportionately to their contributions. Article 59, paragraph 2 of the Civil Code and Article 23, paragraph 6 of the Law "On Limited Liability Partnerships and Additional Liability" expressly states that proportional distribution of shares is applicable only if otherwise is not stipulated in the charter of the LLP. Thus, the legislation gives the founders the right to depart from the standard scheme of proportional distribution of shares and make it non-proportional by stipulating it in the articles of association of the company.

Thanks to this clause in the legislation, the founders of the LLP (the founder and the investor) may stipulate the following in the charter: despite the fact that the investor has contributed the lion's share of the money to the authorized capital (90 million tenge, as in my example), the investor's share, for example, will be 10% and the share of the start-up will be 90%. Of course, if the investor himself agreed to this disproportion. In any case, there are no legislative obstacles to this. This allows investors to enter startups with the generally accepted small share, without scaring startups and allowing them to develop their project.

By the way, the legislative acts of neighboring republics: Belarus, Ukraine, Russia, and Kyrgyzstan have similar reservations. Therefore, the above-mentioned principle of disproportionate share distribution can be safely used by startups and investors in these countries.