how many shares to authorize at startup

There’s no right answer to the question of how many shares you should grant to each person because the quantity only changes their perception of ownership, not the actual value. A founder’s share percentage will stay the same regardless of share quantity. In that case, giving someone just one share would be giving that person almost 1% ownership of the company. Since shares are granted in whole number increments and most grantees receive small percentages of ownership, founders need to have enough shares in play to allow them to be precise when making stock awards. Once you’ve sorted out how many shares your startup has, feel free to check out our extensive options for pitch deck templates to help you raise the funds needed to accelerate your business.

Capital stock is the number of common and preferred shares that a company is authorized to issue, and is recorded in shareholders’ equity. First, how many shares to authorize at startup the company must have authorized shares that have not yet been issued . Second, it must obtain board approval to issue additional shares.

Why does every startup incorporate with 10,000,000 shares?

Note that the number of shares can have an impact on your Delaware state taxes (see So You Owe Thousands of Dollars in Delaware Franchise Tax?). So we suggest you follow this common practice when getting things set up. As a lawyer, Dana dispensed as much business advice as legal advice. Accordingly, although he no longer is practicing law, Dana occasionally provides consulting services to owners and managers of small businesses. To allow plenty of flexibility in allocating shares among founders and other shareholders.

  • In California, state legislation cannot prohibit employees from leaving or being approached by competitors.
  • They asked me to help reallocate shares among them because, as time had passed, they saw that their respective contributions to the business differed from what they initially had expected.
  • If you start issuing stock or stock options to recruit key employees, they may find big numbers more impressive.
  • It also governs all external and internal affairs that can affect the business.
  • Once you’ve decided on your number, you want to decide how you’re going to issue stocks.

Common shares are the most common type of shares companies issue as a means of raising capital through the sale of equity securities hence their name. Companies usually offer a part of their authorized shares and leave some for future offers to investors. They do so in order to have more shares that they can offer to investors in a situation whereby they need to raise funds for the company and want to do so through the sale of shares. Authorized shares refer to the maximum number of shares a company can legally offer for sale to investors. The maximum number is usually indicated in the company’s articles of association or articles of incorporation.

How to Allocate Shares in a Startup?

They are a part of the restricted shares and are used for the startup’s future growth. Please note that stock options give the right to purchase shares of stock but are not actually shares of stock, so a holder of stock options has no ownership in the company until the stock option is exercised. One company has authorized and issued 10 million shares, while another has authorized and issued 1,000 shares.

how many shares to authorize at startup

People just generally like to have a larger number of stock options. I know that sounds a bit ridiculous, but we’re human and we like to feel like we’ve received something of greater value, even if the percentage of ownership is the same. One important aspect when filing the certificate of formation for your corporation is figuring out how may shares the new corporation should issue and authorize. If you plan on raising investment capital, or maybe even taking your company public, then this is not a decision to take lightly.

How do you calculate the ownership percentage of a startup’s shares?

To make employees or contractors who receive shares or options feel like they have received something of greater value. I realize this is a bit silly, but an individual will be more impressed receiving 10,000 shares rather than 100 , even if, in both instances, the number of shares represents the same percentage of ownership. 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. Therefore, having the right number of shares of stock available for the corporation’s use is critical to ongoing operations. 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.

how many shares to authorize at startup

How many authorized shares should a startup have?

Regardless of your initial funding, a new startup's sweet spot is usually 10 million authorized shares. However, just because 10 million shares have been approved does not indicate that all or even the majority of them should be allocated or granted to founders or thrown into the employee stock option pool immediately.