While you’ll hear people use the terms “stock” and “shares” interchangeably, they are not synonymous. It is the smallest denomination of a corporation’s stock and has a specific value (called “par value”). Authorizing shares is a critical step in the life cycle how many shares to authorize of a startup. By considering the key factors and best practices outlined in this article, you can ensure that you’re authorizing the right number of shares for your business.
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To do this, the corporation needs to authorize the issuance of stock via a resolution of its board of directors and enter into stock purchase agreements with the shareholders (founders or investors). When authorizing shares, the corporation must define the quantity, the par value and the classes for the shares. Authorized stock is higher than issued and outstanding stock because companies need the flexibility of issuing additional shares without having to return to the regulatory authorities for approval. For example, a company may specify 10 million shares as the authorized number of shares in its incorporation documents.
- Authorized stock is the maximum number of shares a company can issue.
- Thus, if we were to use the COI example above, a founder in whose favor the company issues 5 million shares would have to pay $50.
- Thus, if a C-corp has authorized 10 million shares, the founders should distribute no more than 3-6 million among themselves.
- Authorized shares can be thought of as the total number of shares a corporation has “on the shelf” to take down and hand out plus any shares that have already been issued.
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- They are typically set aside for employee stock options or other incentive programs.
- This setup ensures the company retains flexibility while complying with state and federal securities regulations.
- In this article, we’ll explore the key factors to consider when determining how many shares your startup should authorize.
- By keeping a significant portion of authorized shares in their possession, founders can ensure that they have the majority voting power and maintain control over strategic decisions.
- It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.
Out of a company’s 10 million authorized shares, founders are typically issued anywhere from 5 to 7 million shares. This practice makes sure that the founders always own a majority of the issued shares even when all 10 million shares have been allocated. Issuing more shares than there are authorized makes those additional shares voidable. Remember, these strategies are just a starting point, and each company’s situation may require a tailored approach. By implementing effective strategies for managing authorized shares, companies can maintain control over their capital structure, mitigate dilution risks, and maximize shareholder value.
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This is the total amount of stocks the company will issue to employees and investors. Not all authorized stocks are issued since some are usually held back for future investing and employee stock options. To incentivize employees, startup founders reserve a percentage of the company to issue employees stock options or other equity incentives.
E.g., California fees jump at 5 million, 10 million, 75 million shares. Now that you’ve decided on the co-founders’ equity allocations and are ready to incorporate a company, let’s translate those percentage allocations into actual share numbers. If you don’t have the co-founders’ allocations settled, check out the post How to Allocate Equity to Startup Founders. “Authorized shares” refers to the total number of shares a corporation can create under its articles of incorporation.
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As you can see, they have ample buffer, 6 million shares, to cover any funding obligations or to handle the unexpected. At some point in the trajectory of your growing company, you will likely amend or restate your Charter—like when you accept a nice big juicy round of institutional funding. 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. This setup ensures the company retains flexibility while complying with state and federal securities regulations. To prevent unintentional over-issuance, it is vital to maintain accurate records and implement controls over equity issuance.
How Many Shares Should Your Startup Authorize?
While most startups authorize 10 million shares, the number of shares issued to founders will depend on the specific circumstances of each startup. It is important to strike a balance between issuing enough shares to attract and incentivize employees, while also not issuing too many shares and diluting the ownership too much. By following these guidelines, startups can set themselves up for success and avoid costly legal and financial issues down the road.
Seven might be your lucky number, but you will probably regret authorizing 7777 shares if you add partners in the future. Learn how to determine the right number of shares for your startup and avoid common pitfalls. Stock option grant prices (or “Buy Prices”) will be cheaper if the strike price is lower.
How Many Shares a Startup Should Issue to Founders
This strategy also helps reduce the impact on existing shareholders by diluting their ownership only when the shares are truly created and distributed. Before we go further, it’s important to get a grasp of the difference between authorized shares, allocated shares, issued shares, and authorized unissued shares. The additional reserves are technically authorized-but-unissued shares.
Limited liability companies keep the personal assets of shareholders — like homes, cars, and belongings — from being used to cover debts or legal claims. To properly answer this question, it’s important to clearly grasp the difference between “authorized” and “issued” shares. The company is free to issue the shares to the shareholders whenever it chooses.