How Many Shares to Authorize and Issue? Dana H Shultz, Esq The High-touch Legal Services® Blogfor Startups!

We provide this website for attorneys and at your direction as a self-help service. Since we are not a law firm, we cannot provide you with any legal advice or explanation, opinion, or recommendation for your legal needs, strategies, or use of the forms on this website. A buyback is a repurchase of outstanding shares by a company to reduce the number of shares on the market and increase the value of remaining shares. In other industries, you often see corporations use much lower numbers, like 1,000 shares.

A corporation with three shareholders could have three authorized shares or millions of authorized shares. Ten thousand authorized shares would work equally well–the share price would be $40.00. For an ambitious start-up, 10 million shares could be https://simple-accounting.org/ the right number. The company might issue forty percent of the authorized shares to founders for an initial investment of $40,000. Some founders like large numbers of shares in order to provide for grants of employees stock options in large numbers.

How Many Shares Should a Company Start With?

If you issue 10 million shares, someone who holds 1 million shares owns 10 percent of the company. If you only issue 1,000 shares and someone buys 100 of them, they still own 10 percent. Owning shares in a company gives you the right to your part of the company’s earnings and everything it owns.

These shares are not distributed or issued but instead earmarked for distribution. There is no one-size-fits-all answer to the “how many shares should a startup company have” question. However, because there are many use cases for the shares, you should have enough shares at the start of your company.

What It Means for Individual Investors

With that said, there are practical and operational limits, which we explore in this post. The number of authorized shares can be changed by way of a vote from shareholders, typically during the annual shareholder meeting. Outstanding shares are the actual shares issued or sold to investors from the available number of authorized shares. Authorized shares are the maximum number of shares a company is allowed to issue to investors as laid out in its articles of incorporation.

Authorizing “x” number of shares doesn’t mean that they will all be issued at once. It’s better to err slight on the side of authorizing slightly more than you think you’ll need in the reasonably foreseeable future. For startups, 10 million to 20 million authorized shares is the norm. When a company starts up, owners must choose an amount of stocks to authorize. This is the total amount of stocks the company will issue to employees and investors. Not all authorized stocks are issued since some are usually held back for future investing and employee stock options. Note that the number of shares authorized can have an impact on your Delaware state taxes.

Definition and Example of Authorized Share Capital

The person who performs the valuation will inform you of approximate worth of your company. You then would make the decision to either sell the assets of the company or the stock of the company. All companies, even the publicly traded ones have a par value on their shares which is much lower than the current valuation of the stock. Most often in a small business corporation the stock is called “no par value stock” which simply means that there is no set amount of payment required to purchase the stock of the corporation. Each time stock is issued, the directors will decide how much must be received for the shares. If the corporation’s stock has no par value, then there is no set “price” for the stock. In this case, the directors can raise the “price” of the stock when the corporation becomes more valuable.

In other words, its structure from the capitalization standpoint is very simple—no options, warrants, or other securities capable of conversion to stock. As long as this is the case, actual ownership of the company would turn How Many Shares To Authorize? on the allocation of the shares issued. The authorized but unissued shares will have zero effect on ownership of the company. Authorized shares are the maximum number of shares that can legally be issued to shareholders.

Subscribed Capital

If a company wants to increase its authorized share capital, it has to amend its corporate charter, which usually requires a vote from its shareholders. This shareholder approval is important because a company issuing more shares will ultimately dilute the ownership of its current investors. People often mistakenly think that authorized stock means the same as outstanding shares.

Additionally, Common stock represents the class of shareholders who shall be paid a dividend last, after the Preferred shareholders are paid first . If there are no Preferred shareholders, then the dividend amounts are split equally among the Common shareholders. Lastly, the company must be able to follow the securities regulations stipulated by the state and federal governments concerning the issuance of the extra shares. It feels way better to say “I own 10,000 units of shares” than to say “I own 1 unit of shares”, regardless of the price.