What Is Authorized Share Capital?

Savvy employees know that there is no difference between 100,000 shares worth 0.01 and 10,000 shares worth $0.10. Remember, you generally want to leave a significant percentage of authorized shares unissued in case the need for additional capital arises in the future. The remaining authorized but unissued shares are available in the event a corporation needs to issue more shares. Determining the appropriate number of authorized shares depends on several factors.

• A dividend is a special payment, usually paid at the end of each quarter, and is based on the profits made by the corporation during that quarter.
• Some employees might be pleased to be given 1,000 shares of stock instead of 10, even if they are worth the same amount.
• Some owners pay themselves a small salary to minimize FICA withholding, and pay themselves a quarterly dividend instead.
• This is because these shares confer special rights and privileges on the investors.
• It is important to note that there are numerous reasons why a startup issue shares as stock options to employees, and it is not limited to the reason given alone.

However, the Articles of Incorporation will also request information about how many shares you are authorizing. If a corporation has 100 shares, then someone who owns 50 of them owns half of the corporation. When a corporation has millions of shares, someone who owns a handful owns only a tiny piece of the company. Bend Law Group is a San Francisco law firm of experienced small business attorneys and startup lawyers.

How many shares should my new corporation issue to stockholders?

Enough shares to satisfy the founders, enough for a pool for employee stock options, and enough to provide for future employees and investors. You set the number of authorized shares at 15 million, award each of you 1 million, then issue the remaining 10 million in your IPO later. If you’d only authorized 5 million shares, Cooley Go says, issuing more would require board and stockholder votes, plus paperwork with your state of incorporation.

• Companies that raise funds from venture capital firms will typically have many classes of Preferred Shares.
• Some startups may also use unissued shares to issue equity to an accelerator program that accepts common stock (e.g., Y Combinator).
• Whether you are looking to establish a corporate, need advice on raising operating capital or considering an IPO, the right legal advice imperative.
• This post discusses the number of shares that a corporation should authorize, and the number of authorized shares that a corporation should issue.
• If the company’s founder and other executives own a majority of the company, they can vote to increase the number of authorized shares with little say from individual investors.

A good rule of thumb is to authorize only what the corporation will need. Corporations with 5,000 or less authorized shares are considered minimum stock and will pay the minimum Delaware Franchise Tax each year. One thing to account for is that some states assess franchise taxes based upon the number of shares authorized. Shares of stock sold by the corporation represent proportionate ownership interests held by shareholders in the corporation. “Par value” is a dollar value assigned to shares of stock which is the minimum amount for which each share may be sold.

How Many Shares should a Corporation Authorize?

A corporation can’t be a corporation without at least one share of stock. You can have as many shares of stock as you want, however, this may increase your filing fees in some cases. Once you’ve sorted out how many shares your startup has, feel free to check out our extensive options for pitch deck templates How Many Shares To Authorize? to help you raise the funds needed to accelerate your business. You do not have to worry about preferred shares when deciding the number of shares the startup has. This is because preferred shares come into being when companies start raising money during funding rounds and not during incorporation.

Subsequently, the board of directors will distribute those shares as part of a subscription agreement or pursuant to a stock compensation plan to employees of the corporation. Authorized shares is the maximum number of shares that the board of directors is “authorized”, or allowed to issue. Issued shares, however, is the number of shares actually “issued”, or given out to shareholders. An important part of corporate structuring for a startup is determining how many shares a startup should have. When a company gets this right, it sets the tone for raising impressive amounts of money for investments and having enough shares as stock options for employees. 80% of the common shares go to the founders, investors, and advisors , while up to 20% goes into the employee stock option pool. Primarily, the founders should have about 50%, the investors should retain 20%, and the advisors should have up to 10%.

How to Divide Shares Between Cofounders & Employees

So we suggest you follow this common practice when getting things set up. Preferred Shares have a “preferred” status and https://simple-accounting.org/ class of rights superior to those of Common Shares. They are typically created and sold to investors in a priced round.

In this article, we identify a few basic legal concepts and business considerations that may be helpful for entrepreneurs who are seeking to understand whether their corporations have the right number of shares. Part of the Incorporation process is filing a Certification of Incorporation with the Secretary of State.

What are authorized shares?

10 million might be the right number for a technology startup company with plans to hire employees and raise funds. Like Goldilocks, you’ll want to find the number that’s just right for you. Your lawyer or other business advisors can address your specific needs and help you along the way. The number of shares authorized will not affect the overall value of the company. Investors use a formula to value your company, and the number of shares does not make a difference to the valuation, it only affects the value of each share at that point in time.

Allocated shares are the shares that have been earmarked for specific shareholders, but not yet issued to them. When incorporating a company, it is best to include the sale of additional shares for later on. So, you and the directors vote and decide unanimously to sell the remaining 200 shares. John Doe subsequently has the $1 million it urgently needs, and ultimately its new factory. The second school of thought is to authorize millions of shares, typically 10,000,000 shares. The exact number of shares your corporation should issue is based on who will actually be owning the company. Some startups pay less than the acceptable market value for their employees due to a shortage of funds.

What is stock and how many shares should be authorized or issued?

Assuming a $15/share IPO price and dilution due to financings, 20 million shares outstanding will result in a $300M market cap, which is about the minimum size necessary to complete a successful IPO. This avoids having to do a reverse or forward stock split at the time of an IPO. How your business does this in reality may vary – there is no right or wrong answer in regards to the employee stock option split, as long as it works for your employees and founding team. Check out the Mailchimp story to get an interesting example of the different approaches businesses take. While distributing or deciding on how to distribute shares among founders, it is important that the founders hold back from allocating or issuing the shares reserved in the founder’s stock.

This information goes right in the company’s Charter, so there’s no avoiding it. When you pick that number, it’s helpful to have a sense about where those shares will eventually go.