How Many Shares Should Your Delaware Startup Issue?

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.

To illustrate, assuming an even equity split and a 10% option pool, each member of a three-person founding team would be allocated 3,000,000 shares, with 1,000,000 shares reserved in the option pool. If you’re struggling to figure out how many shares you want to authorize, Firstbase can help. We’ll also provide guidance on how to structure your company’s equity so that it aligns with your startup’s goals. It’s always smart to consider practical issues like how easy it is to divide shares. That’s why most business founders usually choose a number that can easily be split by ten. The number also needs to be large enough to issue small amounts of ownership, often in the hundredths of a percentage point.

What Are the Dangers of Too Few Authorized 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.

4 State Law Defaults & Filing Fee Thresholds

Startups traditionally distribute anywhere from 30% to 60% of their authorized common shares among founders. Thus, if a C-corp has authorized 10 million shares, the founders should distribute no more than 3-6 million among themselves. 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.

• Delaware asks business owners to disclose how many authorized shares the company needs at formation to figure franchise fees.
• In the end, the optimal number of authorized shares is unique to every startup.
• If they divide all of the authorized shares between the founders, they’ll obviously have to authorize more as soon as they take on employees or investors.

But just because 10 million shares have been authorized doesn’t mean that all or even most of them should be immediately allocated or issued to founders. Entrepreneurs typically set aside shares in an employee stock option pool. A startup needs to maintain a pool of equity to use as compensation for key hires as the business develops over time. It is also usually listed in the capital accounts section of the balance sheet. Authorized shares should not be confused with outstanding shares, which are the number of shares the corporation has actually issued that are held by the public. Authorized stock represents the maximum number of common shares that can be issued legally by the company.

For the owner that expects a $1 billion valuation at the company’s IPO, having a larger amount of stocks to issue is worth the extra fees. Choosing a number depends on how big you expect your company to get and how much you think it will be worth. If you estimate your company’s value to be $1 million at the IPO, then the number of authorized stocks should be 100,000. In the beginning, your business won’t be worth $1 million, so each stock won’t be worth $10.

Startups San Antonio

A lower strike price will also mean their stock option grant prices (or purchase prices) are lower. However you parse it though, remember that both scenarios represent the same equity stake in the startup and are based on the same determination of the fair market value of the company as a whole. If the authorized shares of a corporation must exceed 5,000 shares, the next threshold for you to consider is a share valuation of $75,000. Share valuation is simply the number of authorized shares multiplied by the par value.

FOUNDER FRIDAYS

• They have no special rights and are subordinate to the Preferred Shares.
• By offering an ownership stake through stock options or restricted stock units, you not only enhance employee satisfaction but also bolster their commitment to driving the company forward.
• Authorized shares also affect the company’s valuation, as they indicate the potential dilution of the existing shareholders’ stake in the company.
• To incentivize employees, startup founders reserve a percentage of the company to issue employees stock options or other equity incentives.
• A lower strike price will also mean their stock option grant prices (or purchase prices) are lower.

Having a sufficient number of authorized shares is crucial not only for accommodating future fundraising rounds but also for potential expansion endeavors. By ensuring you have a surplus of authorized shares, you preemptively avoid the time-consuming process of amending your articles of incorporation later on. Allocated shares have been earmarked for specific purposes but have not yet been issued. They are typically set aside for employee stock options or other incentive programs. If your company were to only authorize 1,000 common shares, it would be very difficult to give granular equity stakes to employees as part of their equity compensation over the lifetime of the company. The number of total authorized shares will be equal to the number of issued shares, allocated shares and authorized, but unissued shares.

Take Control of Your Startup’s Future

It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction. Sign up for our weekly newsletter to receive news about San Antonio tech and science startups. Started in 2000 in Washington DC, Masslight has served the DMV for 18+ years. We serve enterprises and startups with full-stack development and long-term project management services. The company plans to grow fast so they are bound to need some seed funding.

The difference between authorized and outstanding shares

Around 20 percent of the total shares authorized is often reserved for the employee option pool, which is typically also used to compensate employees, advisors, consultants and board members. Startup founders get the remaining 80% of the Common Shares at time of incorporation. One of the most important concepts in corporate finance is the distinction between authorized shares and outstanding shares.

The number also changes often, which makes it hard to get an exact count. The number of outstanding shares is equal to the number of issued how many shares to authorize shares minus treasury shares. Companies may also announce stock splits to make the shares more affordable for individual investors. Regardless of your capital at launch, 10 million authorized shares is generally the sweet spot for a new startup company and the number of shares that most corporate law firms would recommend to their clients.