How Many Shares Should a Startup Company Authorize at Incorporation?
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 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.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
View Comments
[...] 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 [...]
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
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.
[...] 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 [...]
Sounds great Jordan. You're on your way. Good luck.
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,
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.
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.
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.
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!!
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?
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.
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)?
@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, 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
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.
Provided you would have the requisite votes, you can amend the charter to authorize additional shares (both in total amount and different classes).
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?
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.
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
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
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
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
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.
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
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.
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?
I agree, 50k does sound better than 5k when you're up in the club LOL!
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.
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.
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
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 ?
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.
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.
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%
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.
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.