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Whenever you are seeking to incorporate in Delaware, one of the first questions that you must address after selecting your entity type, you must determine how many shares your company should authorize upon formation.
There really isn’t an answer that fits every situation for every type of company when making this decision in forming a Delaware corporation or a corporation in any state, for that matter. You should really consult with a corporate lawyer to do your research here and only authorize as many shares as you will need in the reasonably foreseeable future. In addition to reviewing this article, we recommend that you talk to venture capitalists or other investors that may be interested in your company, as well as other startup founders to understand the different combinations of shares issuances that will affect the number of authorized shares at the incorporation stage before you make your decision. You should also speak with a tax advisor if you have any questions about the tax consequences of stock issuance.
Keep in mind that there is no formal requirement for any specific number of shares, and, from a mathematical perspective, a single share could have the same value as 100,000 shares. On the other hand, psychologically, when you issue shares to any individual, 100,000 shares may sound more attractive than a single share. That’s just how our minds work- we tend to assume that bigger numbers indicate more than they may actually. Ultimately, it all depends on the percentage owned and the value of the entire pie.
We at Lloyd & Mousilli created this article with the goal to keep this topic as simple and easy to understand, without losing the nuances in the decisions to be made. We always aim to educate our clients when legal processes are often complex, but can be explained with some details.
Authorized shares are exactly what the name suggests – they are the number of shares authorized to be issued but not outstanding. Shares can be authorized (which means they are reserved and not issued) or outstanding (meaning they are issued and no longer reserved). Authorizing “x” number of shares does not mean that they will all be issued at once. It is the process of issuance of shares that triggers a number of other
A major consideration related to the decision on number of shares to authorize is if you do not authorize enough shares at the formation stage in your certificate of incorporation. When this occurs you may address this issue through filing an amendment to your articles of incorporation with the relevant state office with shareholder approval and by paying additional filing fees. Since this must be approved by the secretary of state’s office, it cannot be done without a public filing. It is for this reason that it is better to err on the side of authorizing slightly more authorized shares than you may think you will need in the foreseeable future. For startups that are focused on technology, it is most common to designate 10 million to 20 million authorized shares.
If 10 million shares are authorized upon incorporation, you may, but need not, actually issue all 10 million shares in total. As mentioned above, you may always make an amendment to the articles to authorize more shares later, but must proceed through the Secretary of State’s office. What is often more important practically is the number of outstanding shares. It is not uncommon for approximately 80% of the unauthorized shares to be outstanding and issued to founders at the outset, with the remaining shares allocated to future founders, advisors, investors, and employees through incentive stock options plans. In general, it is important to leave some portion of the shares (approximately 20%) for the stock you may reasonably foresee will need to be issued at a later date.
As always, you should consult with your Lloyd & Mousilli startup legal team if you have any questions about authorizing and issuing shares in your situation.