The Ideal Number of Shares for Your Startup: A Guide to Authorization

See in the cap table below that Investor purchases 1,000,000 shares of Rocket Corp Series Seed shares for $1 per share, which constitutes 10% of the Company on a fully diluted basis. However, if the Company is sold the very next day, the 700,000 shares available under the equity plan would be disregarded (if any portion of the 300,000 issued options is not vested, those shares may be disregarded too). So while the investor negotiated for a 10% ownership stake, at closing, she actually owns at least 10.75%. This gives the investor assurances that their negotiated 10% will not be immediately reduced by an increase in the option pool immediately after investment. This doesn’t make sense and can be problematic for a couple of reasons.

• The information herein is general in nature and should not be considered legal or tax advice.
• Authorizing shares just makes it possible to issue them, and that can be done on any timeline.
• Authorized shares play a crucial role in maintaining control and ownership within a company.

How Many Shares Should a Company Start With?

This article provides guidance on how to make this decision and what to consider when doing so. Have you ever wondered how many shares you should authorize when incorporating your startup? Well, if you’re about to dive into the corporate world, or you’re in the midst of navigating the complexities of startup incorporation, this question will inevitably pop up. Issuing shares means dividing the ownership of the company into smaller pieces that can be bought and sold. The more shares someone owns, the larger percentage of the company they own. Maintaining a reserve of authorized shares can be critical to avoid delays or legal hurdles when quick action is needed.

Company

Independent of what it means, “I own 100,000 shares” sounds a lot better when you’re at the bar than “I own 10,000 shares”. Preferred Shares have a “preferred” status and class of how many shares to authorize rights superior to those of Common Shares. Allocated shares are the shares that have been earmarked for specific shareholders, but not yet issued to them.

By setting a specific limit on the number of authorized shares, companies can effectively control the dilution of equity and maintain a stable ownership structure. When they take on investors, they may re-evaluate the size of the employee option pool. Investors understand the importance of attracting top talent so they may (and usually do) insist on an increase to the employee pool as part of their investment.

When incorporating a new Delaware corporation, I recommend authorizing 15,000,000 shares of common stock. Of the 15,000,000 authorized shares, divide only 10,000,000 shares initially between the co-founders and an option pool. They are dry powder and are not issued or otherwise reserved unless the company needs them later. For example, the company can use the extra authorized shares to add a late-joining co-founder or increase the option pool reserve if it needs to hire more people than the founding team initially expected. If you’re considering this strategy, you’ll need to set aside a portion of your authorized shares for an employee stock option pool, generally ranging from 10% to 20% of the total. However, if you didn’t set aside additional reserves and you run out of shares to issue, then you’ll have to amend and refile the certificate of incorporation to increase the authorized shares.

How Many Shares Should Your Delaware Startup Issue?

Later on, the corporation may issue another 200 shares to Shareholder B. In that scenario, Shareholder B would be a 66% owner of the business while Shareholder A would be a 33% owner. Each time you issue more shares, the ownership stake of existing shareholders dilutes. By authorizing more from the start, you can mitigate the impact of dilution. The first allocation they will decide is the number of shares that go to the founders.

Take Control of Your Startup’s Future

These two terms refer to the number of shares that a company can issue and the number of shares that are actually issued, respectively. Understanding the difference between authorized and outstanding shares is crucial for investors, managers, and founders, as it affects the ownership structure, valuation, and dilution of a company. In this section, we will explore the key differences between authorized and outstanding shares, and how they relate to equity dilution.

• Until then, it’s quite possible to avoid the hassle and expense of premature amendment filing by anticipating the needs of your likely recipients and leaving yourself enough wiggle room.
• Even for companies traded on a major exchange, if they do a secondary stock issue it dilutes EPS and lowers the stock price.
• Once the company has authorized the type, number, and par value of its shares in the COI, it can distribute them among its initial shareholders.
• Some states, like Delaware, tax corporations based on authorized shares.

It’s a strategic decision that relies on several factors, including your fundraising strategy, dilution preferences, future hiring plans, and potential for company growth. Fidelity Private Shares LLC provides cap table management and other administrative services to private companies and their equity compensation plans. This process varies by jurisdiction but generally includes filing a certificate of amendment and paying a state fee. For accurate filing and compliance, consider consulting a business attorney—one of whom you can easily find through UpCounsel.

The shareholders can increase the number of authorized shares at any time at a shareholders meeting, as long as a majority of shareholders vote in favor of the change. A company’s outstanding shares can fluctuate for a number of reasons. Delaware asks business owners to disclose how many authorized shares the company needs at formation to figure franchise fees. A business has to pay taxes on stocks issued as gifts or stock options. The amount of shares you want to give away is a factor in deciding a total number to authorize. One of the most important decisions that a company has to make is how many shares it can issue to its shareholders, employees, investors, and other stakeholders.

This flexibility enables you to seize unexpected opportunities or swiftly respond to market changes, demonstrating the foresight that investors often value. Serial entrepreneur, engineering & business leader who co-founded and led his last startup to a $14M Series A financing and a successful exit. Years of experience leading teams & building scaleable, secure software systems. As long as you have a high enough number of shares to divide for your future needs, it really doesn’t matter. But there are some practical concerns, like making it easy to divide and visualize—the reason even the quirkiest founder will usually still work with a number that is divisible by 10.

Save 90% on your legal bills

While you may be tempted to allocate or issue most of the share authorization in founders stock, it can be advantageous to hold back, as senior employees may want to take on a more sizable ownership stake as you grow. Preferred Shares held by investors and others are not Common Shares (these Preferred Shares typically convert into Common Shares when a company goes public during an IPO). These shares are authorized in the future when the company raises a priced round from investors such as a Series A. Par value is the minimum price per share, as specified on the company’s articles of incorporation. This is the price that founders typically pay for their shares right after incorporating their companies.