Startup Lawyer | How Many Shares Should a Startup Company Authorize at Incorporation?
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How Many Shares Should a Startup Company Authorize at Incorporation?

Posted 10 Oct 2008

An often overlooked aspect of filing a certificate of formation or articles of incorporation is determining how many shares the new corporation should authorize. 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.

The number of shares to issue at incorporation is somewhat arbitrary, but my preference is to authorize 10,000,000 shares.

Now, that doesn’t mean all 10,000,000 shares will be issued to the founders. You must be careful and select an amount of authorized stock that will account for your startup’s planned issuances and the reserved stock option pool.

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.

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 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.

Update: If you are looking for information about startup company incorporation, check out my “If I Launched a Startup” article.

96 Comments
  • Startup Company Par Value at Incorporation | The Startup Lawyer
    Posted at 08:24h, 11 October Reply

    […] value be set at either $0.01 to as low as $0.00001. My recommendation is based on my belief that startups should authorize 10,000,000 shares of common stock and issue around 8,000,000 to 9,000,000 shares to its […]

    • Jim
      Posted at 17:47h, 23 February Reply

      Ryan.

      I am forming a Corporation in Texas. It is just a small Entity

      with me and my wife as the directors.

      I am creating it to be able to roll over my existing 401k money without paying taxes or penalties. I will then use that money

      to purchase a franchise. I was told I can roll the money into shares of my corporation. The question I have is this. When filing with the Texas SOS I need to give them the authorized number of shares and if it will be par value or no par value. If things work out with the roll over, I will be transferring about 50,000.

      Thank you for any advice

      Jim

      • Carlton Kornegay
        Posted at 22:40h, 25 February Reply

        Jim,
        I have been considering the same type of business funding, rolling 401k into self directed IRA then purchasing shares of C Corp. Until a few days ago, I was unaware of this process and wasn’t completely sure if it was legitimate or a scam. Please let know how the process is working out for you. I have two companies in mind that I have researched through the BBB. One is A rated and the second is A+ rated. Any info that you can provide will be helpful.
        Thank you,
        Carlton

  • Jordan
    Posted at 16:57h, 05 November Reply

    I filed my C Corporation today. I authorized 10,000,000 shares, with 8,000,000 assigned to me, and 2,000,000 authorized as preferred stock.

  • Jordan
    Posted at 11:57h, 05 November Reply

    I filed my C Corporation today. I authorized 10,000,000 shares, with 8,000,000 assigned to me, and 2,000,000 authorized as preferred stock.

  • 7 Legal Documents for Startups | The Startup Lawyer
    Posted at 21:03h, 05 November Reply

    […] startup incorporated. There’s nothing sexy about this document (for now), except that you authorize the amount of your corporation’s shares and set par value. Yet the charter is important because it creates the entity that will hold the IP […]

  • Ryan Roberts
    Posted at 16:57h, 15 December Reply

    Sounds great Jordan. You're on your way. Good luck.

  • Ryan Roberts
    Posted at 11:57h, 15 December Reply

    Sounds great Jordan. You're on your way. Good luck.

  • Wes
    Posted at 18:36h, 23 December Reply

    I am trying to register a new company that I will soley own and run. I am registering the company in utah and the registration for the corporation does not ask for the value of the shares. I was going to use your reccomendation of 10,000,000 shares. Is the value information something I should attach as an addendum and is there anything else you recommend I add?

    Thanks

  • Wes
    Posted at 13:36h, 23 December Reply

    I am trying to register a new company that I will soley own and run. I am registering the company in utah and the registration for the corporation does not ask for the value of the shares. I was going to use your reccomendation of 10,000,000 shares. Is the value information something I should attach as an addendum and is there anything else you recommend I add?

    Thanks

  • Ryan Roberts
    Posted at 19:00h, 23 December Reply

    Wes,

    I'm not familiar with Utah corporations. My suggestion would be to call the secretary of state. They usually have good people who will answer questions like that. I would be surprised if they didn't want to know whether your shares have par value or not, however.

  • Ryan Roberts
    Posted at 14:00h, 23 December Reply

    Wes,

    I'm not familiar with Utah corporations. My suggestion would be to call the secretary of state. They usually have good people who will answer questions like that. I would be surprised if they didn't want to know whether your shares have par value or not, however.

  • Jorge Vasquez
    Posted at 16:41h, 28 January Reply

    HELP!! I have tried looking everywhere, but it seems I can find any information on how many membership units i should authorize. Would it be the same as you have posted here for stock? We will be getting angel investment, not a lot, but some. And we are sure they are going to ask for some units in return.

    I prefer to incorporate as a corporation, but the requirements for a board is too much right now, we just don't know the people who would actually commit. Any help would be appreciated.

  • Jorge Vasquez
    Posted at 11:41h, 28 January Reply

    HELP!! I have tried looking everywhere, but it seems I can find any information on how many membership units i should authorize. Would it be the same as you have posted here for stock? We will be getting angel investment, not a lot, but some. And we are sure they are going to ask for some units in return.

    I prefer to incorporate as a corporation, but the requirements for a board is too much right now, we just don't know the people who would actually commit. Any help would be appreciated.

  • Ryan Roberts
    Posted at 00:49h, 05 February Reply

    Neither Texas or DE require you to authorize a specific number of units when filing. Most of the "additional membership units" issues tend to be tackled in the company agreement.

    I don't think the difficulty of having a board should prevent you from being a corporation. You'll still have management issues with the LLC.

  • Ryan Roberts
    Posted at 19:49h, 04 February Reply

    Neither Texas or DE require you to authorize a specific number of units when filing. Most of the "additional membership units" issues tend to be tackled in the company agreement.

    I don't think the difficulty of having a board should prevent you from being a corporation. You'll still have management issues with the LLC.

  • PA Start up
    Posted at 20:18h, 02 July Reply

    I incorporated in PA and there was never an area to designate shares of stock for reserved shares or any designation of shares for that matter. When is this step accomplished? Is this something that is handled in a business agreement, not in the incorporating process?

    PLEASE ADVISE!!

  • PA Start up
    Posted at 15:18h, 02 July Reply

    I incorporated in PA and there was never an area to designate shares of stock for reserved shares or any designation of shares for that matter. When is this step accomplished? Is this something that is handled in a business agreement, not in the incorporating process?

    PLEASE ADVISE!!

  • Temba
    Posted at 14:19h, 05 July Reply

    We have a company that we set up in a business that requires a license. We have got the license now wish to bring in investors. We want to have at least 55 % as the promoters and have no capital to inject. To set up the operations requires $18 million. The license goes for $3m and not yet paid for. How do we determine the value of the 45% to be issued as shares so that we get the $18m thats required?

  • Temba
    Posted at 09:19h, 05 July Reply

    We have a company that we set up in a business that requires a license. We have got the license now wish to bring in investors. We want to have at least 55 % as the promoters and have no capital to inject. To set up the operations requires $18 million. The license goes for $3m and not yet paid for. How do we determine the value of the 45% to be issued as shares so that we get the $18m thats required?

  • Sissi
    Posted at 15:42h, 08 July Reply

    Ryan, are the total shares of 10M you mentioned common stocks or preferred stocks? If founders get 8M shares as you suggested, and reserve 2M to employees, then you don't have stock pool for perferred stocks for investors. In this sense, it seems you are talking about the total common stocks to be able to issue. What about the corporation needs raise big money from venture captical, like 500k~3M to do a high tech startup.

  • Sissi
    Posted at 10:42h, 08 July Reply

    Ryan, are the total shares of 10M you mentioned common stocks or preferred stocks? If founders get 8M shares as you suggested, and reserve 2M to employees, then you don't have stock pool for perferred stocks for investors. In this sense, it seems you are talking about the total common stocks to be able to issue. What about the corporation needs raise big money from venture captical, like 500k~3M to do a high tech startup.

  • Jamie
    Posted at 12:24h, 22 July Reply

    If I were to authorize 10,000,000 shares of common stock, and state the par calue as $0.001, does that mean I need $8,000.00 on hand to be able to purchase the 8,000,000 shares issued to me as the founder? Does authorizing 10,000,000 shares of stock mean that until I (or the corporation) issue stock to others, the 10,000,000 shares is mine (the company’s)?

  • Ryan Roberts
    Posted at 10:22h, 23 July Reply

    @PA – Not familiar with PA corporate law, but you typically authorize the amount of shares at incorporation via the articles/charter.

    @Temba – I may not completely understand your question, but the value of the 45% is whatever you receive for it.

    @Sissi – They are all common shares. The company will authorize additional shares for the preferred at the financing (via an amended and restated certificate of incorporation). Also, additional common will likely be authorized at that time to allow for the conversion of the preferred to common, among other things.

    @Jamie – The consideration for your stock can be intangible (think IP) as well as cash. Authorizing 10MM shares and issuing 8MM to yourself means that you own 8MM and the company has 2MM remaining for future issuances.

  • Ryan Roberts
    Posted at 05:22h, 23 July Reply

    @PA – Not familiar with PA corporate law, but you typically authorize the amount of shares at incorporation via the articles/charter.

    @Temba – I may not completely understand your question, but the value of the 45% is whatever you receive for it.

    @Sissi – They are all common shares. The company will authorize additional shares for the preferred at the financing (via an amended and restated certificate of incorporation). Also, additional common will likely be authorized at that time to allow for the conversion of the preferred to common, among other things.

    @Jamie – The consideration for your stock can be intangible (think IP) as well as cash. Authorizing 10MM shares and issuing 8MM to yourself means that you own 8MM and the company has 2MM remaining for future issuances.

  • Jamie
    Posted at 17:42h, 23 July Reply

    Ryan, thank you for the feedback. Also, I just did a TESS search for the name/logo that I am looking to trademark and found that there are 3 other owners of this mark. 2 of the three are marketing products very similar to each other as well as similar to mine. Are there significant legal issues involved by using the same product name as the other two, even though they are already competing against each other (my product will be sold in a different market)? am I able to get around this by putting a sybol between the name?
    i.e.: business!name

    -Thank you

  • Jamie
    Posted at 12:42h, 23 July Reply

    Ryan, thank you for the feedback. Also, I just did a TESS search for the name/logo that I am looking to trademark and found that there are 3 other owners of this mark. 2 of the three are marketing products very similar to each other as well as similar to mine. Are there significant legal issues involved by using the same product name as the other two, even though they are already competing against each other (my product will be sold in a different market)? am I able to get around this by putting a sybol between the name?
    i.e.: business!name

    -Thank you

  • Jared
    Posted at 16:35h, 11 September Reply

    Ryan,
    I am trying to start up my own company. However I don’t know how to go about getting stock to issue to investors. I understand that if I get the 10,000,000 shares like you suggest and how to issue them to myself but I don’t understand how I would set some aside to sell to investors. Would I just leave them aside for employees and then issue them to the investors as needed.

  • Jared
    Posted at 11:35h, 11 September Reply

    Ryan,
    I am trying to start up my own company. However I don’t know how to go about getting stock to issue to investors. I understand that if I get the 10,000,000 shares like you suggest and how to issue them to myself but I don’t understand how I would set some aside to sell to investors. Would I just leave them aside for employees and then issue them to the investors as needed.

  • Ryan Roberts
    Posted at 06:30h, 29 September Reply

    Provided you would have the requisite votes, you can amend the charter to authorize additional shares (both in total amount and different classes).

  • Ryan Roberts
    Posted at 01:30h, 29 September Reply

    Provided you would have the requisite votes, you can amend the charter to authorize additional shares (both in total amount and different classes).

  • Jane
    Posted at 10:15h, 02 October Reply

    Hello! I have a few:

    1. After you've issued an options pool for employees – lets say 2M shares – with 8M in the hands of the founders, then when you get series A, what do the funders look for? Do they take their entire share from the founders pool, or from the total pool (making the options pool shrink)?

    2. How many are usually reserved for an options pool, 10%, or 20%?

    3. What methods have you found for founders to determine proportions of ownership?

  • Jane
    Posted at 05:15h, 02 October Reply

    Hello! I have a few:

    1. After you've issued an options pool for employees – lets say 2M shares – with 8M in the hands of the founders, then when you get series A, what do the funders look for? Do they take their entire share from the founders pool, or from the total pool (making the options pool shrink)?

    2. How many are usually reserved for an options pool, 10%, or 20%?

    3. What methods have you found for founders to determine proportions of ownership?

  • Ryan Roberts
    Posted at 16:16h, 05 October Reply

    1. At funding, the corporation's charter is amended to allow for the funder's preferred stock. Thus, the corporation may go from having 10MM shares authorized to 20MM common plus 10MM preferred shares authorized. (The common will be increased so that there is enough common in the event the preferred wish to convert back to common.)

    2. I would say 15-20% is the size falling in the average range. 10% at the lower end. It will depend on how much hiring the startup needs (and of course how much the funders can stick into the pre-money shares).

    3. There's no real method except for a quality conversation between the potential co-founders, including time commitments/constraints, skillsets, IP and other assets being brought to the corporation.

  • Ryan Roberts
    Posted at 11:16h, 05 October Reply

    1. At funding, the corporation's charter is amended to allow for the funder's preferred stock. Thus, the corporation may go from having 10MM shares authorized to 20MM common plus 10MM preferred shares authorized. (The common will be increased so that there is enough common in the event the preferred wish to convert back to common.)

    2. I would say 15-20% is the size falling in the average range. 10% at the lower end. It will depend on how much hiring the startup needs (and of course how much the funders can stick into the pre-money shares).

    3. There's no real method except for a quality conversation between the potential co-founders, including time commitments/constraints, skillsets, IP and other assets being brought to the corporation.

  • Kenneth
    Posted at 23:48h, 06 October Reply

    Greetings:

    I plan to authorize 100M stock at no par value during the incorporation of my company in Delaware. Is there a tax benefit to creating a 0.001 par value for the stock. Will 100M stock at no par value trigger an increase in the filing fee? Thanks for your useful insights.

    Kenny

  • Ryan Roberts
    Posted at 09:03h, 13 October Reply

    I strongly suggest seeking a cpa/accountant to help you with this. I believe you would be foregoing the ability to use the 'assumed par value' calculation for franchise tax purposes (which is something you would not want to do).

    Try this link for more info: http://corp.delaware.gov/fee.shtml

  • Ryan Roberts
    Posted at 04:03h, 13 October Reply

    I strongly suggest seeking a cpa/accountant to help you with this. I believe you would be foregoing the ability to use the 'assumed par value' calculation for franchise tax purposes (which is something you would not want to do).

    Try this link for more info: http://corp.delaware.gov/fee.shtml

  • Tom Foale
    Posted at 02:32h, 23 November Reply

    Temba, if you need $18M it doesn't need to be entirely in equity if the business model stacks up. We are launching a business that will take £1M in equity finance for a relatively small stake, £9M in debt finance and will then finance the building of a £35M plant entirely on debt. This works because the plant revenues and tax situation justifies it.

    You might, for instance, give equity to pay for the operating licence and get debt finance for the rest.

  • North
    Posted at 15:38h, 29 November Reply

    OK Ryan, I am about to take your advice and authorize 10,000,000 shares on my DE COI. (seriously, this week)

    Because I like your advice.

    BUT, I am a little nervous, most others don't recommend this many shares, they usually cite a number in the 10,000 range. I have played around with the Franchise Tax Estimator and it seems safe enough using the Assumed Par Value Capital Method, I just want to be sure I wont create some monstrous future tax liability.

    *We can choose year by year which tax method to use right?
    *Do you have any resource you could point me toward to better understand DE Franchise Tax?
    *Am I correct in understanding that most companies use a much smaller number because they are not needing multiple rounds of outside funding?
    *Is there some pitfall or trap to having this many authorized shares?

    Info:
    # We will (almost certainly) need several rounds of equity financing
    # We may not have revenue for a few years
    # If it helps, we are developing a completely new renewable energy generation technology (it wont be cheap)
    # I am a total novice, and yes we have seed money to hire a great law-firm (want an RFP? We are in Oregon, so that probably wouldn't work)
    # I want to get incorporated on my own,BEFORE hiring the pros, partly a matter of pride, but also will just look better

    The questions and responses here have been very helpful.
    Thanks again, North

  • North
    Posted at 10:38h, 29 November Reply

    OK Ryan, I am about to take your advice and authorize 10,000,000 shares on my DE COI. (seriously, this week)

    Because I like your advice.

    BUT, I am a little nervous, most others don't recommend this many shares, they usually cite a number in the 10,000 range. I have played around with the Franchise Tax Estimator and it seems safe enough using the Assumed Par Value Capital Method, I just want to be sure I wont create some monstrous future tax liability.

    *We can choose year by year which tax method to use right?
    *Do you have any resource you could point me toward to better understand DE Franchise Tax?
    *Am I correct in understanding that most companies use a much smaller number because they are not needing multiple rounds of outside funding?
    *Is there some pitfall or trap to having this many authorized shares?

    Info:
    # We will (almost certainly) need several rounds of equity financing
    # We may not have revenue for a few years
    # If it helps, we are developing a completely new renewable energy generation technology (it wont be cheap)
    # I am a total novice, and yes we have seed money to hire a great law-firm (want an RFP? We are in Oregon, so that probably wouldn't work)
    # I want to get incorporated on my own,BEFORE hiring the pros, partly a matter of pride, but also will just look better

    The questions and responses here have been very helpful.
    Thanks again, North

  • chris
    Posted at 01:24h, 09 December Reply

    Ryan, I need advise. I have an LLC, that is member managed. We are wanting to ask another person to come in and "sell" 30% stake in the business. How do I determine how much would it cost for the person to come in equivalent to 30% of business stake? Thanks

    • sam
      Posted at 10:09h, 07 December Reply

      Dude, this is a question of valuation. There’s no right or wrong answer and it’s certainly nothing anyone could tell you given the information you provided. How much is any company worth? Depends on what the market will pay, usually guided by an evaluation of prospects and management and similarly situated companies and discounted cash flow.

  • chris
    Posted at 20:24h, 08 December Reply

    Ryan, I need advise. I have an LLC, that is member managed. We are wanting to ask another person to come in and "sell" 30% stake in the business. How do I determine how much would it cost for the person to come in equivalent to 30% of business stake? Thanks

  • Kevin
    Posted at 02:58h, 18 December Reply

    If you're considering incorporating in Delaware, check out the DoS tax calculator. http://corp.delaware.gov/taxcalc.shtml

    I issued 1 M shares at a $0.01 par value and authorized half to myself, so I'll need to break a million in revenue before my franchise tax goes to $350.

  • Kevin
    Posted at 21:58h, 17 December Reply

    If you're considering incorporating in Delaware, check out the DoS tax calculator. http://corp.delaware.gov/taxcalc.shtml

    I issued 1 M shares at a $0.01 par value and authorized half to myself, so I'll need to break a million in revenue before my franchise tax goes to $350.

    • sam
      Posted at 10:26h, 07 December Reply

      The calculation is based on gross assets, not revenues.

  • AL
    Posted at 10:24h, 10 January Reply

    I incorporated some time ago because I needed to for certain reasons. Before I knew all about stock, they issued me 1500 shares at $1.00 par value. Can I still turn around and Authorize more shares so I can now sell them to investors? Do I have to do that legally and change it on my corporation papers? How much can I authorize and at what price could I sell and how much do I keep for myself in order not to lose control.

    AL

    • sam
      Posted at 10:11h, 07 December Reply

      1500 shares were issued, but how many were authorized? Check your certificate of incorporation. If you need to authorize more, an amendment to the certificate of incorporation will be needed. That’s not a big deal, but it requires a fee and a filing with the secretary of state. Delaware law also allows for amendments to the par value in the certificate of incorporation, though I cannot say whether there are any tax or accounting issues that arise on account of this.

    • sam
      Posted at 10:15h, 07 December Reply

      You can authorize as many shares as you want (if there is a limit I am not aware of it, but of course authorizing a trillion shares would be absurd). As for control, do the math. If you issued 100 shares and you own 51 of those, you control. If you issues 2 million shares and you own 1 million and 1 shares, you control. It’s not complicated. Note that the number of authorized shares is irrelevant (if you authorize 10 million shares and issue only 1 share to yourself, you own 100% of the company).

  • AL
    Posted at 05:24h, 10 January Reply

    I incorporated some time ago because I needed to for certain reasons. Before I knew all about stock, they issued me 1500 shares at $1.00 par value. Can I still turn around and Authorize more shares so I can now sell them to investors? Do I have to do that legally and change it on my corporation papers? How much can I authorize and at what price could I sell and how much do I keep for myself in order not to lose control.

    AL

  • Perry North
    Posted at 11:56h, 20 January Reply

    Ok, so now I have the start-up and the 10mil shares.

    Where can I find data that would provide me with a place to start as I consider offering stock and options for key personnel? For my venture to succeed I'll need to surround myself with quality people and providing a share of the pie seems to be the advice I've been receiving lately.

    I’m sure that as the responsibility grows, so does the ratio. Can it be tied to performance guarantees? Will all stock be lost if they do not perform or last in their position due to their own efforts (or lack thereof)?

    Thanks in advance for you comments.

  • Perry North
    Posted at 06:56h, 20 January Reply

    Ok, so now I have the start-up and the 10mil shares.

    Where can I find data that would provide me with a place to start as I consider offering stock and options for key personnel? For my venture to succeed I'll need to surround myself with quality people and providing a share of the pie seems to be the advice I've been receiving lately.

    I’m sure that as the responsibility grows, so does the ratio. Can it be tied to performance guarantees? Will all stock be lost if they do not perform or last in their position due to their own efforts (or lack thereof)?

    Thanks in advance for you comments.

    • sam
      Posted at 10:18h, 07 December Reply

      Research qualified stock option plans. Also understand restricted stock and vesting. Typically ownership legs in over a period of time; 25% after 1 year of service, 6.25% each quarter thereafter (in a typical 4 year vesting schedule). But you can structure it as you like.

  • Jason Charles
    Posted at 22:28h, 09 February Reply

    Ok- I'm starting a online gaming company , and will go with 10,000,000 shares – would giving the value of 1 dollar be right?

    I keep 7,000,000 shares and sell the rest to investors to raise the capital, is that correct?

    • sam
      Posted at 10:24h, 07 December Reply

      Read Ryan’s post. These are common shares; they go to the founder and to a stock option pool. Investors usually invest in preferred stock, which gives them a preference on liquidation and various control and management rights. A “value of 1 dollar” doesn’t make much sense. If that’s par value you’re talking about, it’s pretty high (it’ll cost you $8 million to buy your founders shares; maybe you have that kind of cash and maybe the company requires capitalization at that level, but it’s a big bite). If you’re talking about an actual valuation of the company, is $1 per share right? Well, go talk to some investors and see if they’re willing to pay that, answer their questions about assets, products, customers, revenues, and you’ll see . But for a startup company that’s nothing more than an idea and an enthusiastic founder, not many investors are likely to take that deal.

  • Jason Charles
    Posted at 17:28h, 09 February Reply

    Ok- I'm starting a online gaming company , and will go with 10,000,000 shares – would giving the value of 1 dollar be right?

    I keep 7,000,000 shares and sell the rest to investors to raise the capital, is that correct?

  • Chris
    Posted at 14:17h, 10 February Reply

    I agree, 50k does sound better than 5k when you're up in the club LOL!

  • Chris
    Posted at 09:17h, 10 February Reply

    I agree, 50k does sound better than 5k when you're up in the club LOL!

  • Mech Eng
    Posted at 22:35h, 15 February Reply

    I am new to the idea of incorporating. I am a Mech Eng looking for funding and I am either as dumb as a stump or someone has just turned on the light switch. From the past examples of authorizing 10 mil shares at the time of incorporation where 1 mil is to be issued/offered either to private shareholders or from an IPO and 9 mil are retained by the company to maintain control. Let’s say that the 1 mil shares were offered at $1 per share and just for sh_ts and giggles, let’s say they were all sold, raising $1 mil in capital for the company. Does this now mean that the other 9 mil shares retained by the company has a value of $9 mil. Does this mean that the company could use the 9 mil share “worth” $9 mil as collateral for future funding.

    • Carlos
      Posted at 15:50h, 28 July Reply

      Basically yes. If you sell 10% of your company for $1M, then the implied valuation is $10M. My advice is not to go down that road, meaning don't even have "valuation" discussions with accredited investors. Instead offer an extremely investor centric private placement memorandum (or term sheet). For instance by offering non-participating preferred shares with a 5x liquidation preference investors are able to be protected with strong downside protections while still enjoying a potential upside. Meanwhile the founder still retains the majority of the stock, and in theory have 3-5 rounds and only sell 10% of the company.

  • Mech Eng
    Posted at 17:35h, 15 February Reply

    I am new to the idea of incorporating. I am a Mech Eng looking for funding and I am either as dumb as a stump or someone has just turned on the light switch. From the past examples of authorizing 10 mil shares at the time of incorporation where 1 mil is to be issued/offered either to private shareholders or from an IPO and 9 mil are retained by the company to maintain control. Let’s say that the 1 mil shares were offered at $1 per share and just for sh_ts and giggles, let’s say they were all sold, raising $1 mil in capital for the company. Does this now mean that the other 9 mil shares retained by the company has a value of $9 mil. Does this mean that the company could use the 9 mil share “worth” $9 mil as collateral for future funding.

    • Carlos
      Posted at 10:50h, 28 July Reply

      Basically yes. If you sell 10% of your company for $1M, then the implied valuation is $10M. My advice is not to go down that road, meaning don't even have "valuation" discussions with accredited investors. Instead offer an extremely investor centric private placement memorandum (or term sheet). For instance by offering non-participating preferred shares with a 5x liquidation preference investors are able to be protected with strong downside protections while still enjoying a potential upside. Meanwhile the founder still retains the majority of the stock, and in theory have 3-5 rounds and only sell 10% of the company.

  • Jim
    Posted at 22:47h, 23 February Reply

    Ryan.

    I am forming a Corporation in Texas. It is just a small Entity

    with me and my wife as the directors.

    I am creating it to be able to roll over my existing 401k money without paying taxes or penalties. I will then use that money

    to purchase a franchise. I was told I can roll the money into shares of my corporation. The question I have is this. When filing with the Texas SOS I need to give them the authorized number of shares and if it will be par value or no par value. If things work out with the roll over, I will be transferring about 50,000.

    Thank you for any advice

    Jim

  • paul
    Posted at 03:03h, 02 March Reply

    Hi I incorporate a c corp. I am wondering what is the process to issue the shares?

    do i need to file special papers for that or just pretty much write on a paper signed by the founders(i m the only founder) ?

    is it necessary to buy the stock certificate ?

    i m really confused? please help

  • paul
    Posted at 22:03h, 01 March Reply

    Hi I incorporate a c corp. I am wondering what is the process to issue the shares?

    do i need to file special papers for that or just pretty much write on a paper signed by the founders(i m the only founder) ?

    is it necessary to buy the stock certificate ?

    i m really confused? please help

  • Ron
    Posted at 15:12h, 02 May Reply

    Hi,
    My business partners and I, are on the verge of being incorporated. I wanted to know out of the 10M that you recommend if we leave 8M to ourselves and have the rest at a face value of maybe 0.001 do we have to have the money up front for our 8M shares? or would it be okay if we just invest a set sum of money in our Corporate funds once a month ?

  • Ron
    Posted at 10:12h, 02 May Reply

    Hi,
    My business partners and I, are on the verge of being incorporated. I wanted to know out of the 10M that you recommend if we leave 8M to ourselves and have the rest at a face value of maybe 0.001 do we have to have the money up front for our 8M shares? or would it be okay if we just invest a set sum of money in our Corporate funds once a month ?

  • Jason Knipp
    Posted at 22:05h, 08 May Reply

    I am trying to decide on how to incorporate as a LLC or a S-corp. My question is how do you find the investors to give you the capital to grow with stock that they will buy. Or how do you sell the members ships into a LLC and where do you sell them. Is there someway to offer them on a website. I have refrained from incorporated due to not knowing where to sell the stock. Is there someplace or somebody that i can raise capital by selling stock to.

  • Jason Knipp
    Posted at 17:05h, 08 May Reply

    I am trying to decide on how to incorporate as a LLC or a S-corp. My question is how do you find the investors to give you the capital to grow with stock that they will buy. Or how do you sell the members ships into a LLC and where do you sell them. Is there someway to offer them on a website. I have refrained from incorporated due to not knowing where to sell the stock. Is there someplace or somebody that i can raise capital by selling stock to.

  • Adrian
    Posted at 22:11h, 06 July Reply

    Hello,
    I want to open up a very small private employement agency. I will need a certificate of incorporation to file an aplication for the private employment agency. I will be the only one working for my company and I do not know how many shares should i authorized. I do not even care about how many there will be authorizerd, I just want to full fill the state requirements.

  • Adrian
    Posted at 17:11h, 06 July Reply

    Hello,
    I want to open up a very small private employement agency. I will need a certificate of incorporation to file an aplication for the private employment agency. I will be the only one working for my company and I do not know how many shares should i authorized. I do not even care about how many there will be authorizerd, I just want to full fill the state requirements.

  • Carlos
    Posted at 10:40h, 28 July Reply

    I am a first time entrepreneur and just founded my first start-up. I will spend the next 1.5 years executing a $13M dollar private placement offering for my web start-up. I initially authorized 50,000,000 shares (45,000,000 common, and 5,000,000 preferred). However I will soon increase that to 260,000,000 shares (26,000,000 preferred shares). This should be enough for my Series A of $0.50 per share, as well as the Series B, C and D.

    Board of Directors: 10%

    Executive Management: 10%

    Future employees: $10%

    Accredited Investors: 10% (and a 5x liquidation preference)

    Investor Relations Department: 2.6%

    Founder(s): 57.4%

  • Carlos
    Posted at 15:40h, 28 July Reply

    I am a first time entrepreneur and just founded my first start-up. I will spend the next 1.5 years executing a $13M dollar private placement offering for my web start-up. I initially authorized 50,000,000 shares (45,000,000 common, and 5,000,000 preferred). However I will soon increase that to 260,000,000 shares (26,000,000 preferred shares). This should be enough for my Series A of $0.50 per share, as well as the Series B, C and D.

    Board of Directors: 10%

    Executive Management: 10%

    Future employees: $10%

    Accredited Investors: 10% (and a 5x liquidation preference)

    Investor Relations Department: 2.6%

    Founder(s): 57.4%

  • Karen Fender
    Posted at 13:55h, 06 August Reply

    Personally preparing to buy selected assets of a 30 yr. old service company that has been run as subsidiary of public company since it was purchased by them 10 years ago. Plan is to start as one owner LLC in PA, with myself and 3 folks planning to contribute up to $50K each to start-up costs. I need to incent them fairly without losing control of company or assets, but will also want to attract future talent. Another 4 people expected to join us when old company shuts down. We will be transitioning active projects and proposal pipeline with associated AP and AR with parent company blessing. They are keeping tax ID# and associated NOLs. Our cash flow forecast is very promising.

  • Karen Fender
    Posted at 08:55h, 06 August Reply

    Personally preparing to buy selected assets of a 30 yr. old service company that has been run as subsidiary of public company since it was purchased by them 10 years ago. Plan is to start as one owner LLC in PA, with myself and 3 folks planning to contribute up to $50K each to start-up costs. I need to incent them fairly without losing control of company or assets, but will also want to attract future talent. Another 4 people expected to join us when old company shuts down. We will be transitioning active projects and proposal pipeline with associated AP and AR with parent company blessing. They are keeping tax ID# and associated NOLs. Our cash flow forecast is very promising.

  • Startup Company Par Value at Incorporation | Startup Lawyer
    Posted at 21:51h, 20 October Reply

    […] recommendation is based on my belief that startups should authorize 10,000,000 shares of common stock upon filing the its charter. The startup will then typically issue about 6,000,000 to 8,000,000 […]

  • CEO
    Posted at 05:24h, 03 December Reply

    Ryan,

    I have just formed my new company last month in Delaware as a C corporation and I am in the process of getting funding through either a private placement or via Angels investors. We plan on an IPO in our 5th or 6th 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 without paying to much franchise tax to Delaware? I was thinking initially about 6 million or do you think 9 million?
    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 or does that need to be done immediately? Can I wait until Jan 2011 (2 months after incorporation)

    Thoughts?

  • CEO
    Posted at 05:24h, 03 December Reply

    Ryan,

    I have just formed my new company last month in Delaware as a C corporation and I am in the process of getting funding through either a private placement or via Angels investors. We plan on an IPO in our 5th or 6th 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 without paying to much franchise tax to Delaware? I was thinking initially about 6 million or do you think 9 million?
    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 or does that need to be done immediately? Can I wait until Jan 2011 (2 months after incorporation)

    Thoughts?

  • Hoyt
    Posted at 15:52h, 27 December Reply

    Setting up C corp in Nevada, they will only issue up 75,000 at start up with no additional fee, 1st should i increase that number..2nd How much preferred vs common should i issue. there are 4 partners total,

  • Ray
    Posted at 14:41h, 04 January Reply

    Ryan, thank you for taking time to host this website. I find the information very valuable. I have an IT launch offering another option to ebay, Amazon, ect. that will beta launch this month with a hard launch scheduled for March and need more capital to finish the programming/web design.

    How does Regulation D exempt offerings fit into all of this when selling shares of a C corp for startup capital? I see Rules 504,505, and 506 apply to Regulation D. I will have a Nevada C Corp completed shortly and do not want a security violation in the selling of shares to an investor. Do you have any input or a link addressing this issue, or is it an issue? Do you know what filings I would have to do to sell shares to private accredited and non-accredited individuals?

    I find our article on convertible debt very helpful as I can move forward with the promissory note using the convertible debt method to raise capital while the Nevada C Corp is finished.
    Thank you

  • ATM INC.
    Posted at 16:25h, 07 March Reply

    I started a s-corp with 1,000 share reading the above that was a bad choice

  • The Checklist Every Entrepreneur Should Read Before Launching a Startup
    Posted at 10:32h, 16 September Reply

    […] or Corporation 2. State of Incorporation: Delaware 3. Authorized Shares in Charter: 10,000,000 Shares 4. Type of Shares: Common Stock 5. Par Value of Common: $0.0001 6. Initial Founders […]

  • john
    Posted at 18:37h, 23 October Reply

    50,000 DOES sound better up in the club! Hilarious.

  • What Legal Form to Choose for your Startup? « Omar Haroun's Blog
    Posted at 10:26h, 27 November Reply

    […] Decide on how many shares to authorize…I recommend reading bothYokum’s post and Ryan’s post on this topic before making this […]

  • Omar Harouns Blog » What Legal Form to Choose for your Startup?
    Posted at 03:27h, 29 November Reply

    […] Decide on how many shares to authorize…I recommend reading both Yokum’s post and Ryan’s post on this topic before making this […]

  • abdulgadir abdi
    Posted at 09:45h, 29 November Reply

    Am business developer. I was seeking investors through partners. We have found one investor almost signing on he dotted lines. Thanks to him, we are in business. I have been trying to get investors for three years… and am financially strapped now.

    I just recently found that my girlfriend is terminally ill with cancer. Just found out two days ago. Medical bills will start coming, we have no money.

    How do i cash-out on this deal? My share is 8% of this new venture. Capital investment is $24 million.

  • CEO
    Posted at 12:12h, 11 December Reply

    Ryan do you know what percentage a corporation should allocate for the employee stock options pool? Do you it is typically 5%, 10%, 15% or 20%?

  • Josh IC
    Posted at 00:42h, 08 February Reply

    Hi Ryan:

    I love all your posts. Haven’t gotten such solid info on startups anywhere else.

    I am about to incorporate my startup. I am authorizing 10M shares and keeping 8M shares for myself with a 2M option pool. Someone’s is trying to invest $10000 for a 7% ownership. Is this a good deal, and how many shares should I give this person?

  • Brandon
    Posted at 16:44h, 09 February Reply

    Just a quick question. I’m in North Carolina and want to start a C Corp. I’ve read something online that puzzles me. I’m starting it with three people, one of which is bringing all the startup capital to the table. She brings none of the expertise and will not run it on a daily basis. Is it true that she must have a certain percent ownership of the company per law or can we suggest any percentage we want to her? We were thinking 45%.

  • Access Legal » Par Value of Common stock » Access Legal
    Posted at 04:41h, 26 March Reply

    […] recommendation is based on my belief that startups should authorize 10,000,000 shares of common stock upon filing the its charter. The startup will then typically issue about 6,000,000 to 8,000,000 […]

  • Jimmy Bell
    Posted at 15:14h, 14 May Reply

    I have started an LLC and will need investors so we have decided to create shares. My question is, if I’m needing to raise an estimated $10 million for my project then how many shares and how much should they cost each. Also how many shares should me and my partner keep each.

    • sam
      Posted at 10:39h, 07 December Reply

      Jimmy, you seem to be going at this backwards. It doesn’t matter how many shares anybody has (by the way, in an LLC equity is termed “membership interests” or “LLC interests”). You need to determine how much your company is worth. That’s not an easy exercise, but you’re going to have to convince someone it’s worth at least $10 million. At a pre-money valuation of $10 million, you’ll be selling 50% of the company to an investor for an additional $10 million (for a post money valuation of $20 million … The $10 million you claimed before the cash cam in, plus the investor’s cash). Again, whether that 50% equity stake is represented by 1 membership interest out of a total of 2, or 50 billion out of a total of 100 billion, it makes no practical difference. Note that for tax and some documentation issues, some institutional investors and VC funds will shy away from investing in LLCs. Finally, you might consider setting out clearly why you need $10 million on day one. Typically companies will raise a smaller amount, spend it to good effect (developing products, hiring good people, getting customers and market and branding) and then, with a higher pre-money valuation, go to the market looking for more capital. Few startup businesses could justify taking a $10 million bite all at once on day one.

  • Damien
    Posted at 00:13h, 05 April Reply

    When I started my C-Corp, I launched with the default – 1500 shares. Now I realize my mistake – is there an easy way to correct that? I’m taking on a partner who has been really instrumental in the development of my product, and would like to grant him some stock as payment.

  • What Legal Form to Choose for your Startup? | Omar Haroun
    Posted at 18:37h, 21 April Reply

    […] Decide on how many shares to authorize…I recommend reading both Yokum’s post and Ryan’s post on this topic before making this […]

  • Tom Foale
    Posted at 21:32h, 22 November Reply

    Temba, if you need $18M it doesn't need to be entirely in equity if the business model stacks up. We are launching a business that will take £1M in equity finance for a relatively small stake, £9M in debt finance and will then finance the building of a £35M plant entirely on debt. This works because the plant revenues and tax situation justifies it.

    You might, for instance, give equity to pay for the operating licence and get debt finance for the rest.

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