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.

Comments

  • http://www.startupcompanylawyer.com Yokum

    @Rich – The company would authorize more shares (typically preferred stock) and sell newly issued shares to the investor.

  • http://www.electricmotorsport.com TK

    Let me start by saying it's cool your taking time to do some Q&A on your site.

    My Green Tech company here in the Bay Area has been in business since 2001 and just recently became a California C Corp 8 months ago. I am the sole owner and for the first time am looking to raise some investment capital for the company. I am inexperienced in corporate capitalization and have found attorneys with their billable hours make for expensive teachers. Do you have any recommended books that can get me up to speed on the topic of start up capitalization.

    Thanks

  • http://www.startupcompanylawyer.com Yokum

    @TK – Try the Entrepreneur's Guide to Business Law by Bagley/Dauchy. There is an Amazon associates link on this blog.

  • http://twitturly.com Joel

    Hi Yokum,

    I know this post is old, but I am in the process of creating a C-Corp in California, and this post almost answers what I am looking to get answered. I am hoping that maybe you can help me work out the finer details.

    I have been operating a website for a little over a year now, and now we are looking to raise capital, so I need to make the business formal – basically, I've been running the company, but it hasn't been a legal entity. Currently the company has no revenues. We are in the process of raising an Angel round (we intend on doing a VC round too), and I've recently brought partners on board so it now needs to become a true company.

    I have put about $30k into it so far, and hundreds, probably thousands of hours into it. A few months ago, I brought two people on board, both working entirely for equity – they haven't brought any capital into the company. Between those two, they will own 15% of the company, I own the rest for now. One outright owns 8% since he was always worked for equity, while the other is “earning” his 7% over the next year since he was initially paid for his work (1099 worker).

    More to the point, what is a good number of shares to start with for a structure setup like ours? And how do I value the par? I've read here and elsewhere that between 1M and 10M is a good number of shares to start with. Is that true? and what are the benefits of doing 1M vs 10M shares?

    Should the par just be valued off of what I have actually put into the company, or can I include the IP that we've built so far (basically just creating my own valuation based on what I think it's worth)?

    When looking at the paperwork, it looks like I can authorize the board to issue preferred stock, should this be done at the creation, or will it be done when we raise the angel/vc rounds so I should just say no for now? If we do offer this right to the board from the get-go, do I need to specify the number of preferred shares?

    I know some of these questions we'll need to talk with an attorney, but we don't have one yet. Do you know of any that you can recommend in the Sacramento or San Fransisco area (we're in Sac)? Ideally, someone that might be willing to defer their fees until we raise an Angel round. I'm not even positive what qualifications to look for, so any help you could provide in this regards would be very appreciated.

    Thank you for your time and advice.

  • http://www.startupcompanylawyer.com Yokum

    @Joel – Answered live, since I like your web site.

  • http://www.startupcompanylawyer.com Yokum

    @Joel – good chatting with you live.

  • Trixie

    I am a owner of a company and I owned 100 % of the company. I issed myself 10,000 initially when I formed the company. I am wondering what value should the shares be? Working on my bylaws and wondering what should be the par value of the 10,000 shares. Or the value of the shares?

  • http://www.startupcompanylawyer.com Yokum

    @Trixie – You should engage a local attorney or accountant to help you with these questions. If you already issued the shares, you should have paid for them. The par value should be listed in the articles/certificate of incorporation.

  • Kim Sherwood

    Do you have to have shares available? For instance, I am starting up a business, Event Planning. I have decided to as an S Corporation. When asked share questions I am a bit confused as I am sole owner. I have two investors but they are getting a return on their money by other means than shares in the company. Do I need to have shares disclosed when incorporating?

  • Blake

    Hello, just came across your article. I just created an LLC through Intuit. There was an error an only about 10,000 shares were created, but I was trying to go with 10 million, as you say, to have all the extra available. Is there a way to create additional shares as a company? I can’t seem to be able ti find this information. Thanks.

  • http://www.startupcompanylawyer.com Yokum

    @Kim – You need to chat with your own attorney. I don't really know where to begin since the questions reinforce that you are confused. You have to have at least one share authorized in your COI. Many technology startup companies will authorize 10 million or more.

  • Carsten

    Hi, This seems like a great blog but I have to admit I only understand half of it. I'm in the process of creating a Limited company in Ireland (may not be your market, but maybe you could give me some general advise). When I started to form the company I was told that I should authorize 1 Million shares of 1 EUR each and have 100 issued shares. When I asked why I was told this is the market standard for startup companies. Now my silly question:

    1. Why can't I just create 100 authorized shares and issue 100 shares to the 3 share holders in the company?
    2. Is it not better for a startup company to have less authorized shares?
    3. Even if we do plan to get investors in at some stage in the future, will they not just take a percentage of the company? (For me it seems not really to matter if I give away lets say 100000 of my shares to a investor or 10% stake in my company)
    4. If I only have 100 issued shares between me and my business partners and 1 Million authorized shares and just for arguments sake say, an investor comes in and want to receive 1000 shares would that not make him the major shareholder in the company and would I not lose control over it?

    I'm sorry for my silly questions but I'm trying to get my head around this and can't seem to find the right answers. I hope you can help.

    Many thanks
    Carsten

  • http://www.startupcompanylawyer.com Yokum

    @Carsten – I have no particular expertise on Ireland.

    1. Sure, you could if it were DE.

    2. There may be some franchise tax advantages to having a low number of authorized shares in DE, offset by negatives associates with the numbers being off market..

    3. Yes, it's just math, but it's market practice.

    4. Yes.

  • Wayne

    I've been invited to join a new start-up company by an old friend. He has offered me 30,000 shares of what I'm sure will not be preferred stock. It will be a privately held company with a plan to have a liquidating event in 5 to 7 years, a plan that he did almost to the letter with a previous start-up.

    I'm a novice at this and I have no idea if 30,000 is a good number or not. I'm wondering if I should negotiate for more shares? Or is it more important to investigate the price at which they are valued now? Or other info I would need to know from him?

    Any advice? Thanks much.

  • msasha

    Can you authorize shares with LLC? Is the number of shares different for LLC from S-corp?
    What methods do you use to “assume” the initial price of a share?

  • http://www.startupcompanylawyer.com Yokum

    @msasha – You could issue “shares” with an LLC, but it would require a custom complex LLC operating agreement. This is not a DIY thing. You should engage an attorney.

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  • Jamesjk

    Yokum you are so kind to help and give of your time to all of us.

    I'm currently writing my Articles of Incorporation as a new c-corp start up.

    I am having the most difficult time finding information whether or not to include preferred shares in the initial issue.

    I'm not much of a finance person so I am not too familiar with it all.

    Do I need to worry about issuing preferred shares? We plan to bootstrap as long as we can.
    If I do need to issue some preferred shares, do I or my co-founder take any those or are they solely for investors?
    What percentage of my total shares issued should be preferred? If we need to issue preferred shares right now.

    Again, thank you for your time and help.

  • http://www.startupcompanylawyer.com Yokum

    @Jamesjk – Most companies that intend to receive investment from venture capital investors do not include “blank check” preferred stock in their certificate of incorporation. It isn't prohibited — it's just customary practice to not include it because the venture investors will remove it later. Generally speaking, you do not have to worry about authorizing preferred stock at incorporation.

  • Jemimi

    Hi Yokum,
    Thanks for this informative and very easy to understand/read blog articles. My friends and myself ( total of 4 indiciduals) decided to start our own software company, we have an idea, business plan and all of us are basically the only owners/employess. We did not invest any cash into it or assets asside of our personal time and dues to certain vendors. We wanted to register the business as a C Inc. How many shares should we issue in the situation like this, since there was no initial cash investment involved? Should we incorporate it or would it be a better idea to form LLC ( or nay other type?) at first while we're still working on the product development?
    Thanks in advance,

  • http://www.startupcompanylawyer.com Yokum

    @jemimi – you should discuss this with your own attorney as there are too many fact specific issues.

  • joshen5252

    I am incorporating a CA c-corp. I have $2000 cash investment and $3000 in ppe invested. the price per share times the number of shares have to equal 5000?

    In CA is there limits or fees for to many shares outstanding?

  • joshen5252

    I am incorporating a CA c-corp. I have $2000 cash investment and $3000 in ppe invested. the price per share times the number of shares have to equal 5000?

    In CA is there limits or fees for to many shares outstanding?

  • joelehrlich

    Is there any way for emplyees of an LLC to be able to buy into a form of stock certificates?

  • http://www.startupcompanylawyer.com Yokum

    @Joel – Depends on the LLC Operating Agreement (if any). Most people hold ownership interests in an LLC, as opposed to X number of shares, unless the Operating Agreement provides for units or shares.

  • halichamus

    Hi Yokum, incredibly thoughtful blog. Thank you so much.

    One issue I have not seen explicitly here is the equity distribution for founders as they approach Series A. Here is the issue, I have been advised that a 40-40-20 split (40% founders, 40% preferred and 20% ESOP) would be desirable for a tech startup reaching Series A. This split is an assumption upon arriving at the Series A with this 40-40-20 split. In other words, of 100M shares authorized, founders split the 40M shares, another 40M 'preferred' shares is reserved for possible Series A investors and 20% is on the high side of normal for what investors would like to have on hand to hire new employees immediately after Series A funding. First question: does this ratio seem plausible to you? Too conservative?

    Second: If founders have not used up their 40% (of 10M authorized) and reach Series A, what happens then? Should founders grant additional shares to each other prior to reaching Series A?

    Thank you.

  • Dan

    I have more or less the same question(s), but with a couple of key differences:

    * We are doing an S-corp instead of C
    * Aside from people who are getting stock because of their contributions to our project, I have one friend who wants to buy his shares. If we are not planning on taking much more investment than that, is an S-corp going to be OK for this situation? How many shares should we incorporate with?

    Thanks

  • http://www.startupcompanylawyer.com Yokum

    @Dan – if you are not planning to establish an option pool or issue more stock, then it probably makes sense to keep the authorized number of shares extremely low (i.e. 1000) because franchise taxes in some stated (like DE) can be kept low if the number of authorized shares is low. Please keep in mind that there is some administrative hassle with the S corp such as giving Schedule K-1s to the shareholders.

  • mariaCA

    I am incorporating in California (C corp), transitioning from a bootstrap business to one where we have two angel investors committed to putting in $200K. They are to get Series A preferred shares (@ $1 par value), and we also will have common stock granted to myself and my CTO for services to date (vesting to start June 2009 when we began the business, total grant 267,500). We're leaving 82,500 for the future common stock pool. Total valuation $550,000. Now that I'm filing for incorporation, do I need to put both the Preferred and the common stocks into my articles of incorporation (we're planning to use an online incorporation service to expedite things)? Or can I file with the standard common stock template and then amend the articles? Don't want to make a delay because we would like the money to come in ASAP, of course. Is it complicated to put two types of shares into the articles? Can I use a template I have or must I use a lawyer to do this Article IV? Thanks so much!

  • http://www.startupcompanylawyer.com Yokum

    @Maria – you need an attorney to help you. What you've described is beyond a do it yourself project.

  • mariaCA

    Hi, Yokum, we don't have the cash to hire the lawyers right now–can we do a simple incorporation with only common stocks now, award investors common stock now, and later change the angel investors common stock to preferred stock? Would that be done by holding a board meeting, followed by voting to change the articles of association (and filing an amended articles with the state, with lawyer help), then voting to change the common stock already issued to these 2 investors to preferred? Is that chain of action possible? Thank you for your reply!

  • RachaelLW

    My husband is a general contractor. His company, owned only by himself, no partners or co-owners, was previously an LLC. I just dissolved the LLC in order to start up a C-Corp (research has proven better tax advantages…and, besides, GC's aren't protected personally by an LLC in California so it was completely pointless). Our newly appointed CPA suggested the C-Corp and, being the internet research loving person that I am, I have read and read and read up on it. I guess trying to sound smart and informed when I met with this CPA backfired because he gave me the homework of creating the C-Corp myself. Well, I don't want to pay him to do it anway. But I am having a hard time with just one thing…issuing shares. My husband has no intention of sharing the company anytime soon, if ever, or of taking on any partners in the future (unless serious luck is bestowed upon him and overnight this company turns into the equivalent of KB Homes). So, lets just say for now that he is the only owner, he is the only owner that will ever exist, and any future employees will not have any options to purchase stock. How many shares of stock should we list on the Articles of Incorporation? Heck, why does there have to be any shares anyway? All these huge numbers (10mil, 100k, etc.) seem ridiculous. It's just him, doing most of the physical work by himself…and me sitting at the computer typing up his invoices. I just want to be able to write off more stuff and not be subject to self-employment tax. Can I just type “This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized to issue is 10″ under Section V?

  • http://www.startupcompanylawyer.com Yokum

    @Rachael – yes, 10 shares are okay. Most people would do 1,000 so there is a little bit more granularity in the event additional shares will be issued to others, like family members.

  • annabelle1976

    Dear Yokum,

    I am incorporating my business in California. It's a small Private Catering Company and it's basically a one person operation. My lawyer is asking me about a number of shares to be issued and I don't know what's best for tax purposes. I don't really know how it works the more shares are to be issued the more you pay in taxes? The lawyer tells me they normally issue 200 shares, which compared to the numbers I see in these posts seem pretty low. Can you please give me some advice. Thank you.

  • http://www.startupcompanylawyer.com Yokum

    @Annabelle – if it is a one person catering company, a low number of shares is fine.

  • tommy585

    Hi Yakom

    Very good blog here mate! I am in the process of incorporating and offshore company to deal in Precious Metals Trading. I would appreciate if you could advise me in the start-up share allocation for a company authorised to raise $1m .

    Share Authorisation –IBC2

    One Million Shares

    Par Value US$1 per Share

    Share Classification

    Class A Share

    1 Share = Common Stock Full Voting Rights

    Subscribed to by IBC 1

    Class B Share

    999,000 Shares = Common Stock or Preferred Stock (I think Preferred Stock)? NO Voting Rights

    Allocation Maximum 49 % = 489,510 shares Subscribed to Private Equity Investors, however it will only equate to start with towards the initial capital required for one consignment value to be traded within a normal trading cycle, so it will not be that 49 % of Class B Stock is fully issued to start with. Probably in the range of 4-5% of available shares would be allocated per trade.

    The value of our shares offered/allocated would be in that what investors would be willing to pay for them in return for a company that has a;

    1) Good concept
    2) Good business plan
    3) Good ROI
    4) No future IPO'S will be entered into
    5) No dilution of fixed share value -the reason I say fixed value is that shares allocated /issued will be a set capital value required to enter that trade cycle. Prior preferred stock issues will have priority for dividends as per ROI for their respective cycles, as well as priority over common stock holders. So no pre-emptive rights or subscription warrants are necessary.

    The Other 50 % of Stock will not be made available to start with and will be held in reserve so as to avoid hostile takeovers as such I don’t think there could be as IBC 1 owns IBC 2. Would that be right?

    Also I would think that would avoid major hassle with Venture capital funding as they wouldn’t be interested in lack of common stock and we wouldn’t be interested in hostile takeovers any way’s.

    Thank you in advance if you answer me

    tommy

  • http://www.startupcompanylawyer.com Yokum

    @tommy – you should consult with you own attorney, as you will clearly need one to set up the structure that you have outlined.

  • Puneet

    Hello Yakom

    We (3 founders) have incorporated a company in Delaware. All 3 of us are non-U.S. citizens and we do not even reside in the U.S.. Could you direct me, if there can be any tax liability on us as individuals in the U.S. since we hold shares of a company based in the U.S.?

    I ask this to know about any tax consequences bequeathed upon us due to possessing the shares of a U.S. based company in the long term, and to decide if and how to opt for the Section 83(b) election in the short term, since mine is a Restricted Stock Purchase and I do not have a U.S. Taxpayer ID as required in that election.

    Any help is greatly appreciated.

    Thanks,

    Puneet

  • Uberuncle

    Great blog! In California, are there any extra fees or taxes assessed depending on the number and par value of common stock shares after they are initially authorized in the Articles of Incorporation for a C-corp?

    Thanks!

  • Nycdays300

    I have just formed my new company last month in October in Delaware as a C corporation and I am in the process of getting funding through a private placement or Angels investors we plan on an IPO in our 5th year.

    When I issue equity to the investing parties I want to make sure I cover myself where I am protected in terms of ownership and for the future. I have a few quick questions regarding issuing equity and wanted If I could get your opinion.

    1) My company has authorized 10,000,000 shares. How much shall I issue to the founders like myself and the initial directors? I was thinking initially about 6 million or do you think 9 million (but don’t want to pay too much Franchise tax to Delaware)

    2) I want to make sure my portion is not diluted out also, how can I ensure this?

    3) I’m hiring a CFO soon should I give him shares or a percentage of the company?

    4) How shall I split that between preferred and common?

    5) After incorporation is there a deadline when I have to issue the shares? Can I wait until Jan 2011 (2 months after incorporation)

    Thanks Yokum great site!

  • http://www.startupcompanylawyer.com Yokum

    @NYCdays

    1. Doesn't matter. That's just math. I typically suggest 9M.

    2. You can't.

    3. You should express equity as an exact share number, not a percentage.

    4. Startups typically don't authorize preferred stock.

    5. You can issue stock anytime.

  • Nisa Malone

    Where do I got to get shares authorized in California?

  • deevy

    Hello Yokum,

    I was wondering, if I start a c corp in Delaware and authorize 9M shares @ .01 per share, how do I actually become owner of the shares? Do I own all issued shares as founder and CEO or do I have to purchase each of them in much of the same way an investor would? Also I would like to know if I could reward them as bonuses to myself, if so, are there limitations to the bonus amount of shares issued to a CEO yearly?

  • Nycdays300

    Yokum we’ve incorporated our company in Delaware and will be issuing shares soon to investors. We’re basically doing 100k rounds to Angels which equate to 1% of the company to raise a total of 1.2 million therefore giving away 12% of the company. The question we have are:

    1) What do we need to do to issue the shares. Do we just get the share certificates from a company like Corpkit and then issue them?
    2) Do we need to register these shares anywhere? (SEC or private body)
    3) What type of agreement/contract do we need to create?
    4) At what point can the client sell the shares in a private company?
    5) What other things do we need to consider?

    Thanks Yokum excellent website and blog!

  • Bhotchkiss

    Yokum, I have read through your responses to other questions and thought I would seek a bit of friendly advise as well. I am in the process of forming an internet company, which I am putting in all my own start up capital (spprox $50,000-$100,000). I have no intensions of bringing in any investors or vulture funds. I was thiking about forming a Deleware Corporation, then issuing myself/trust owned by me all the stock (estimating 20,000,000 shares). My goals are to incentivise employess/independent contractors through some stock “gifts” based on their contributions. My five year plan is to sell a large amount of stock or possible sell the whole company. Based on the above overview of my plan does does 10MM shares of stock sound like a reasonable amount of shares? I realize that 10MM shares maybe somewhat delutive to each share, but I want to be able to keep offering stock “gifts” in addition to financial compensation to my employees as they hit certain sales benchmarks. This way I can offer 100 shares at the end of every month to all 5 of my employees and not significantly dilute my ownership in the Corporation. As this company is being started from my vision and my bank account I would like to make sure I do not give up more that 75% of the company to my employees.
    Thank you in advance for any advise you can offer Yokum.
    Best wishes,
    B

  • Ryan

    Thanks for your blog.  It's terrific.  I incorporated a Delaware C corp earlier this year and authorized 10 million shares and issued 6 million shares to myself as the sole founder.  The startup (a website) is still in the early development phase but now I've had an unexpected change in plans wherein I intend to add a second co-founder and split the equity with him almost on a equal basis.  So I was thinking I would authorize more shares, up to 20 million but perhaps only 17 or 18 million, and issue at least 5.5 million shares to my new co-founder.  In the next several months we plan to give another 10% equity to engineers etc. before we raise an equity round of financing.  In this situation should I authorize another 10 million shares so that I have 20 million total, or is 20 million too many at this early stage before we've launched or raised any money?

  • Kenneth

    I am in the process of taking on the CEO role in a young company.  The founder has previously given away about one third of the outstanding stock in the company for various reasons not many which were justified.  He has issued all of the authorized stock.  My question is what percentage of shareholders vote is required to authorize more stock?  Do stock option holders have a vote?

  • Pommysagoo

    Hi Yokum,
    I love your blog. I'm hoping you can help me here.

    I'm the founder of a medical company. I've just incorporated it and registered it here in Ontario, Canada.

    As it is a new firm. I'm trying to raise approximately $850,000 from a private investor(s).

    I need to issue a shareholders agreement. Could I start by saying that the firm will commence with 1,000,000 shares?

    Here is the share distribution:

    46% – P.Sagoo (myself)
    15% – K.Sagoo (my son who will handle the Sales & Marketing)
      9% – My CTO
    15% – Private Investor #1 (investing $425,000)
    15% – Private Investor #2 (investing $425,000)

    Could you tell me how the share distribution should be in the above instance please?

    Thank you

    Pommy Sagoo
    Email: pommysagoo@me.com

  • CEO

    Yokum I was wondering if
    you could help me answer a question with regard to a percentage allocation for
    the employee stock options pool. Do you think typically that is 5%, 10%, 15% or
    20%?

     

    We’ve just formed a
    Delaware corporation authorized for 10,000,000but just
    can’t any information on what % should of that should be allocated for this pool? We're initially doing an convertible debt deal and then a 15% equity deal , with 4 other rounds until a planned IPO.

     

    Thoughts?

  • Marlene Schluter

    Yokum, thanks for the blog and your invaluable knowledge and expertise. Much appreciated. I have a question re: a Delaware Corp. I incorporated in 2001 and at the time raised a small amt of money and issued common shares to investors. We were unable to “get the project going” due to the tech bust and things were put on the back burner, so to speak and the deal was nonexist.. I am the sole officer and director. We authorized 100M common and 5M preferred at pv of .001. I forfeited the company in terms of agent representation in 2009 due to cancer. I am now considering bringing the company back to good standing via certificate of renewal and original agent in Delaware CSC has agreed to represent the company. Question ? I want to file an ammendmt and change share structure to 10M common and not sure about the preferreds. Are these shares considered restricted as per the old 144Rule or are they vested and considered free trading?  What would u recommend as I would like to move forward? Do I issue all new physical shares to all original investors or do you recommend I consider an option to buy back their stock? Majority have indicated they are not interested in participating.
    Hope this isnt two confusing and any comments are greatly appreciated.
    Sincerely,
    Marlena