In addition, restricted shares, which are reserved for employee compensation and incentives, are also part of authorized shares. The total number of a company’s outstanding shares as seen in the balance sheet is the sum of float and restricted shares. Investors are used to seeing 10 million shares, but you can choose any number to authorize.
How Many Shares Should a Company Start With?
By granting various amounts of equity to employees, it aligns their interests with the company’s growth. This strategy not only connects employees to the business’s success but also creates a workforce committed to pushing the startup forward. Startup founders use Capbase to incorporate, issue stock, raise funds, onboard new hires, and more. Most founders have little clue about how cap tables work when they start their first startup. Keeping accurate records of your cap table is essential for startup founders if they plan on raising capital from VCs or selling the company. Down the road, a majority of shareholders, or the board, can vote in favor of authorizing additional shares when the need arises.
3 Par Value & Franchise Tax Trade-Off
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. The price of a stock is basically the present value of future earnings per share as perceived by investors. If a company’s profit is $1 million and they have 10 million shares, it is .10 per share. Even for companies traded on a major exchange, if they do a secondary stock issue it dilutes EPS and lowers the stock price. When it comes to authorizing shares for your startup, it’s essential to get it right.
Outstanding Stock Vs. Authorized Stock
First, if you authorized 10 million shares, you probably included in that authorized share figure some number of authorized preferred shares, such as 2 million. Managing authorized shares is a crucial aspect for companies, as it directly impacts equity dilution and the number of shares that can be issued. This section aims to provide comprehensive insights from various perspectives on effective strategies for managing authorized shares. A commonly adopted starting point is to authorize 10 million shares. Typically, founders might initially issue themselves between 6 and 8 million, leaving the rest for future employees, advisors, and investors.
- Authorizing too few can trigger charter amendments before each round, incurring legal fees ($1,000–$2,500 each in many states).
- Keeping accurate records of your cap table is essential for startup founders if they plan on raising capital from VCs or selling the company.
- Allocated shares are the shares that have been earmarked for specific shareholders, but not yet issued to them.
- It can happen for various reasons, such as raising capital from investors, granting stock options or warrants to employees, executing a stock split or a reverse stock split, or issuing convertible securities.
- Let’s say John wants to open a new professional corporation and authorizes 10,000 shares in the articles of incorporation.
In order to form an S-corporation, a business must first legally incorporate itself into a C-corporation. After a company becomes legally registered as an C-corporation, the business can then submit federal Form 2533 to the IRS to begin the procedure of transitioning to an S-corporation. State forms, filing fees and an official annual meeting, including minutes, need to be completed before a business can be legally recognized as an S-corporation. Moreover, states may impose restrictions on the number of shares a professional can own.
Anticipating Dilution:
- Founders should note that with a standard fully diluted calculation, shares are by definition overstated by a bit.
- From a legal perspective, authorized shares provide a framework for regulating the issuance of new shares.
- Most entrepreneurs incorporate their company as a Delaware corporation with only shares of common stock authorized at time of incorporation.
- So, if you’re just starting out, it’s best to leave around 40% of your authorized stock unissued.
If the founders wish to have a 10% option pool for employees, 600,000 shares are reserved for issuance as stock options (or other equity incentives). In summary, authorized shares play a vital role in limiting share issuance and maintaining a balanced ownership structure. They provide legal and financial safeguards for both companies and investors, ensuring that equity dilution is controlled and shareholder value is preserved. By understanding the importance of authorized shares, companies can make informed decisions regarding capital raising and protect the interests of their shareholders. When a company starts up, owners must choose an amount of stocks to authorize.
Authorized stock is the maximum number of shares a company can issue. Outstanding stock is the difference between issued stock and repurchased stock held for resale. Issued stock is what the company has issued, which is less than the authorized stock. Reverse stock splits reduce the outstanding stock but increase share prices. On the other hand, authorized shares also serve as a protective measure for investors.
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 how many shares to authorize 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 To Authorize?
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.
How to Determine the Number of Outstanding Shares
Some companies’ founding documents let them authorize an unlimited number of shares, but not early-stage startups, which need to maintain stability and confidence by authorizing only a set number of shares from jump. ☝️ One more question you never have to ask yourself when you use Capbase. We make it easy to divide shares among co-founders, employee stock plans, and investors—and keep track of who owns what. So you’re ready to incorporate your startup, which means you’re looking to hire engineers, start selling product, and ultimately get investment dollars. This is a question you have to decide on as a business owner when first forming your company. Owning shares in a company gives you the right to your part of the company’s earnings and everything it owns.
With 10 million authorized shares, this company is nicely positioned to get all the way to their Series A round before needing to amend their Charter and increase the number of authorized shares. It’s key to strike a balance between retaining control over your company and offering a worthwhile stake to investors. Usually, allocating about 15–30% of the total shares to investors hits the sweet spot. Because 10 million is a big enough number to ensure you have enough to issue compelling incentives to employees while leaving a substantial ownership stake to you, the founder, in order to secure future funding. Issued shares are the shares that have already been transferred to stockholders—founder shares, employee shares and investor shares. When it comes to keeping founders happy, incentivizing new hires, being ready for unseen future developments, getting ready to take on investors—the number of shares you authorize at the outset goes a long way.
The first company would have a price per share of 10 cents per share. Issued Shares are the number of authorized shares that the corporation has actually issued to all its stockholders. Legally speaking, the number of issued shares cannot be greater than the number of authorized shares. Therefore, authorized shares are an important aspect of corporate finance that affect the number of shares that a company can issue and the value of those shares. Companies need to balance the benefits and costs of authorized shares and consider the interests of their shareholders.
This reserved number of shares is called the “option pool” and is most commonly the number equal to 10 to 20% of the currently issued shares. A company that wants to issue shares must be aware of these factors and comply with them accordingly. A company must also balance the benefits and costs of issuing shares, as it may affect its valuation, capital structure, ownership, control, and future prospects.