How many shares should be authorized in the certificate of incorporation?
January 25, 2008
I usually advise companies to authorize around 10 to 15 million shares of common stock. Around 8 or 9 million shares are issued to founders with a 1 million to 2 million share option pool, for a fully-diluted base of around 10 million shares. The remaining authorized but unissued shares are a reserve in the event more shares need to be issued.
From a purely mathematical perspective, it doesn’t matter whether there are 1 million or 10 million fully-diluted shares. However, when companies are granting options to new employees, even the smartest engineers feel better receiving options to purchase 100,000 shares as opposed to 10,000 shares, even if it represents the same percentage ownership of the company.
Assuming a $15/share IPO price and dilution due to financings, 20 million shares outstanding will result in a $300M market cap, which is about the minimum size necessary to complete a successful IPO. This avoids having to do a reverse or forward stock split at the time of an IPO.
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15 Responses to “How many shares should be authorized in the certificate of incorporation?”
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Very informative blog. I notice many founders initially invest a few thousand dollars since they issue their shares at a $0.001 per share. If founders are prepared to invest more, such as $30,000, for 6,000,000 shares, is there any problem with having a share price at $0.005. Is it better to stick to the $0.001 share price and just issue more shares? Or is the actual number and share price arbitary at this point as long as it is low?
I think that any price per share to founders below $0.01 is fine. The main factor is keeping the outstanding share number within reasonable limits and not having the price per share so high that employees receiving options do not suffer from shock about the exercise price. If a founder wants to put a significant amount of money into the company, the founder may want to loan the money via a “demand” promissory note.
I am a startup company, thinking of incorporating in Delaware. I am wondering if I should incorporate with 100 Million shares, at par value $0.001 and then issue about 20% (20 Million shares) to myself, employees and board of directors.
Franchise tax with the assumed par value capital method would be $250, since gross assets in the first year would be really low.
Investors could take a portion of the company .. say
20% in Angel Round
20% in Series A
20% in Series B
20% for IPO.
20% owned by employees.
I wouldn’t have to worry about dilution EVER !!!
Let me know if this would be a good strategy.
Thanks,
-Anil
100 million authorized shares seems high. At each round of venture financing, the company will have to amend the certificate of incorporation to create the specific series of preferred stock. In addition, many venture capitalists will not allow the company to have too many extra authorized shares of common stock. Thus, it really doesn’t make sense to have so many authorized shares — as the preferred stock (and common stock issuable upon conversion) will get authorized at each financing round anyway.
Hi,
I’m about to incorporate as an Iowa C Corp and having trouble deciding how many shares I should issue. I’m starting a website and have an agency willing to invest $50,000 in non-cash resources (website and software design and implementation) in consideration for 10% of the stock.
I want to give away no more than 45% of the company through pre-IPO rounds of investment (%15 angel, %15 VC, %15% mezzanine). I’m considering their investment part of the angel investment.
My question is this: Should I authorize 10,000,000 shares and then give them 1,000,000 and myself 9,000,000? Should I authorize the 10,000,000 and then issue them 1,000,000, myself 5,500,000 and leave the rest as treasury stock?
I was also considering (for the first option) selling my stock to investors with a repurchase option or an ROFR on it. Can I, for instance, sell my shares to investors with an agreement that I may repurchase the shares for them at a multple of what they purchased them for?
Thanks,
Amos
I don’t understand why you would issue your “investor” 1,000,000 shares and yourself 5,500,000 shares — if you intend to only give away 10% of the company for the “investment.” The problem with talking about percentages is that it isn’t clear exactly what the denominator for calculating the percentage is and the point in time for measurement. If the deal is $50K of non-cash resources buys 10% of the company, then the question is whether it is 10% of the fully-diluted (including an option pool that you haven’t mentioned) and whether it is 10% immediately after the founder issuances.
Issuing 9,000,000 to founders and 1,000,000 to the “investor” seems logical. Authorizing extra shares (i.e. 15 million authorized may make sense). You need to talk to an Iowa corporate attorney for advice on whether extra authorized shares results in unnecessary extra tax.
As an aside, keep in mind that issuing common stock at different prices (i.e. $0.0001 to founders, and $0.05 to the “investor”) close in time can create tax problems. This is one reason why preferred stock is issued to investors.
Finally, typical sophisticated investors would never agree to a right of repurchase on their stock at a fixed multiple of purchase price or a ROFR.
Sorry, I should have been clearer…
On your advice, I would authorize 10,000,000, for the purposes of example excluding any option pool.
Then, as I am a founder, I might issue myself 55%, or 5.5 million shares.
They are technically investing, but might also be considered “founders” (they are building the only true asset of the company and the difference is uncertain to me) and so I issue them what would constitute their fully diluted 10%, or 1 million shares.
This all takes place at time of incorporation.
After incorporation, I then have 3.5 million shares available to investors.
I suppose I assumed that there would be no difference in issuing myself 90% as opposed to 55% if my intention was always to give up the balance to investors. If this is not so, maybe you could help me understand how it is different (selling shares I own and reinvesting proceeds as opposed to selling shares the company owns to garner capital)…
I’ve considered offering them preferred stock (want to give them incentives to make me a superior website), but if preferred stock usually has no voting rights wouldn’t that make them a little nervous about management, dilution, etc.?
As to the last point, I am interested in reclaiming shares while remaining fair to early-stage, smaller investors. I thought that allowing myself to repurchase the shares at a much higher price as long as it was done within a year or so of original investment (after which the option expires) was a good way to safeguard control and allow for a very good return on their investment… Keep in mind these early, early investors are going to be people I know and/or am related to.
Forgive my questions if they seem ill-conceived - I have no corporate experience whatsoever.
Thanks for your help.
Still don’t understand the questions. You need to engage and work with an attorney as your questions are specific to your particular situation.
The issue is whether the 10% you have promised is protected against future dilution (which is should not). Thus, at the beginning, there should be a 90/10 split. If additional shares are issued in the future, then all previous shareholder would be diluted. If you don’t do a 90/10 split at the beginning and don’t sell the remaining shares that you had earmarked, then the 10% would end up being a much larger percentage than 10%.
Selling shares by a founder results in taxable gain to the founder. Most investors want to purchase newly issued shares so the money goes into the company.
Preferred stock has voting rights in the typical startup company context.
Yokum, I appreciate the manner in which you reduce the complex issues to simple answers. You are a boon to us all - thank you!
I am a serial entrepreneur, now advising new and emerging companies on governance and other issues. One company had issued 100 million shares before asking for help. There are only a few shareholders and I have advised a roll back before financing. Please comment - and again, many thanks.
Having a 100 million shares issued before a financing doesn’t make sense. If the company does a Series A financing and the pre-money valuation is low (say $5M), then the price per share in the Series A will be $0.05, which seems particularly low.
QUESTION:
I am involved in a startup. we have incorporated out of Delaware; our CPA issued 3,000 shares with a par of .01; to keep costs down (relative to franchise tax, Delaware). Moreover, the cap. contribution was $50,000.00.
Wondering if anyone in this forum can foresee any problems with this, and if there is an easy way to amend how many shares we have issued to the company? Moreover, keep franchise tax of Delaware down as well.
thank you
You will probably need to do a forward stock split if you ever create an option pool or do an IPO, as the price per share will be extremely high.
Please see the post “How do you calculate Delaware franchise taxes?” to model how franchise taxes are calculated under Assumed Par Value Capital Method, as opposed to the Authorized Shares Method.
thank you in advance for helping and i’m sorry for the many questions, here is my story…..
i’m incorporating in Delaware next week and issuing 10 Million shares. I’ve hired 4 engineers and a project manager to develop my patent-pending technologies. i am funding my startup using my own savings, the cost to develop the first phase of the product is $40,000. The project manager “who owns the software development company” offered to invest $10,000, which means i will only have to pay him $30,000 now to get my software/product developed. i am think about going to an attorney to establish a “Promissory Notice” for this project manager.
i’ve been working on this project for 2 years, and he just joined met 2 months ago.
1. How much? AND What type of stocks should i be offering him ?
2. Is his investment considered CASH or what exactly ?
3. Does he become a partial owner in the company ?
4. Does he get a share of the revenue that i’m going to generate the first year before going to investors ?
5. He also has an interest of becoming the VP of engineering, what should i offer him for this position ?
6. Should i consider him a founder ?
7. Should i issue more shares ?
please help thank you
You need to consult with a competent attorney.
1. It depends.
2. I don’t understand the fact pattern.
3. It depends.
4. Why would he?
5. Up to you.
6. Up to you.
7. It depends.
So I notice you guys are talking about C-Corps but what about S-Corps? I am starting a company where there are 3 partners at 35% each. We are going to go get start up money around 100K from a private investor at first to start developing the product and after that look for angel investing. First off is S-corp the best way and second how many shares should I take out?
Thanks