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How many shares should be authorized at incorporation?

By May 6, 2024No Comments

When forming a new Delaware corporation, deciding the number of shares to authorize in the Certificate of Incorporation is important. The authorized shares are the maximum number of shares a corporation is permitted to issue under its Certificate of Incorporation. While this number can be changed later, doing so requires additional filings with the state. Depending on the company’s stage, it may also require further approvals from both the board of directors and stockholders.

In a typical startup situation, assuming the company has no significant assets, it’s recommended to authorize 10,000,000 to 15,000,000 shares of common stock in the Certificate of Incorporation. From these authorized shares, 10,000,000 shares would be allocated among the corporation’s founders and a potential option pool. Shares in an option pool are reserved for future issuances to employees or other service providers. The initial size of an option pool usually ranges between 10% to 20% of the company’s original allocated shares. So, for example, a company might distribute 8,000,000 to 9,000,000 shares among its founders, reserving the remaining 1,000,000 to 2,000,000 shares (out of 10,000,000) for its option pool.

Founders should determine the size of the option pool based on their hiring plans between incorporation and the company’s first round of venture capital equity financing. With each round of equity financing, the lead investor typically requests an increase in the option pool to cover option grants for another 12 to 18 months of hiring.

Extra authorized shares simply exist as “dry powder” and are not issued or reserved unless needed later. The company can use these shares to add a late-joining co-founder or increase the option pool if more hiring is needed than initially anticipated.

If the company will start with significant assets (around $650,000 or more), then minimizing state franchise taxes may be a consideration during its early stages. Authorizing fewer shares might be desirable in such cases, but this should be weighed against the preferable optics of the founders and employees holding a normalized number of shares, and the costs of amending the Certificate of Incorporation or instituting a stock split later to increase the number of authorized shares.

If you have any questions or doubts about how many authorized shares are the best choice for your situation, you should consult with legal and tax professionals before incorporating.

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