How Many Shares of Authorized Stock Should a Startup Company have at Incorporation?
An often overlooked aspect of filing a certificate of incorporation is determining how many shares of authorized stock should the new corporation authorize at incorporation. This decision doesn’t really matter to most businesses (I don’t have a clue how many shares I authorized when I incorporated my law firm), but startup companies aren’t like most businesses. Most businesses don’t grant stock options or seek venture capital. Thus, the organization and capitalization of your startup is important from the outset, and this all begins with how many shares of authorized stock your startup authorizes.
The short answer: 10,000,000 shares of Common Stock
The number of shares of authorized stock to authorize at incorporation is somewhat arbitrary, but my preference is to authorize 10,000,000 shares. And this type of stock is usually ‘plain vanilla’ Common Stock and not something like dual class common stock for founders.
Are these 10,000,000 shares issued at incorporation?
Now, that doesn’t mean all 10,000,000 shares of authorized will be issued to the founders immediately upon incorporation. The startup must be careful and select an amount of authorized stock that will account for your startup’s short-term planned issuances and the reserved stock option pool — at least for the short term. Otherwise, your startup will have to incur additional filing and/or legal fees to increase the shares of authorized stock once you reach the maximum. It’s not going to break the bank, but it can be discouraging to incur another $250 in just filing fees because your startup used up all its authorized stock so quickly.
For example, say you authorize 10,000,000 shares. You may want to keep a reserved option pool of 1,000,000 shares, thus you would only issue up to 9,000,000 shares to the founders. But we usually recommend that a startup issue about 60% of its authorized shares at incorporation.
Why 10,000,000 and not 100,000? Or 1,000,000?
Of course, you could obtain the same result by authorizing 1,000,000 shares with an option pool of 100,000 and a 900,000 common stock issuance to the founders. But for some reason, people (and when I say people I mean the developers/consultants/directors getting the stock options) like to have a larger number of stock options even if the percentage of the company would be the same. I guess 50,000 stock options sounds better than 5,000 when you are up in the club. And vanity does play a part…sometimes.
Note: Delaware calculates franchise taxes in two ways, either by the total amount of authorized shares or by the assumed par value capital method. Most startups (especially those that authorize 10,000,000 shares) should choose the later method — and should not freak out when Delaware sends the annual franchise tax notice.
Pro and $$$ Saving Tip: Set your par value low.
Update: If you are looking for information about startup company incorporation, check out my “If I Launched a Startup” article.