How Many Shares Should be Issued to Founders at Incorporation?

I typically advise issuing 50% to 80% of the authorized shares of Common Stock to the initial founders upon incorporation.

Thus, if the certificate of incorporation authorizes 10,000,000 shares of Common Stock, an aggregate of 5,000,000 to 8,000,000 share should be issued at incorporation.

If the startup plans to bring on additional founders in the very near future, or for some reason wants a large option pool, then that initial number should be closer to 50% than 80%.

While your startup can always authorize additional common stock (upon appropriate board and stockholder consent), keeping a good-sized reserve of unissued, but authorized shares means that you will not have to incur the transaction costs associated with increasing the authorized shares. In order to increase the authorized shares, your startup will have to file a certificate of amendment with the secretary of state which has filing fees associated with it.

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Incorporation

9 thoughts on “How Many Shares Should be Issued to Founders at Incorporation?

  1. Hey Ryan,

    Great website. Could you comment some more on the rationale behind issuing a larger percentage (50-80%) of the authorized shares to founders rather than a smaller one like 20-30%?

    I recently incorporated a company and my first instinct was to issue a large percentage of the authorized shares to founders, as you suggest. Somewhere around 80% is where the founders expect our ownership to be prior to heading into Series A funding.

    However, after looking around the internet a bit, I see quite a few people suggesting to issue a much lower percentage initially, like 20-30%. They suggest room for the option pool and room to allow preferred shares to convert to common as reasoning for the lower initial issuance.

    If it matters, this is for a web startup. Thanks.

  2. The key is to leave enough room that you can do additional things like authorize an option pool without having to go back to Delaware and increase the authorized common. Don’t worry about the preferred shares yet because you will just authorize the preferred and then increase the common at the round of financing. Thus, 20-80% could be right depending on how much additional common you plan to issue (prior to a financing). The key is to leave ample wiggle room.

    1. I understand. Thanks!

  3. How does this change for single founders? Does it matter how many shares single founders issue?

  4. Hi Ryan,

    Great site! I have been advised to authorized 10M, issue 5M (founders) and 1M (employees), and 4M (floating). Is it common?

  5. I can see the rationale for keeping 20-50% reserved for additional founders so that you can save on the filing fees. But am I right in assuming that you would still need to update the docs to cover shareholder vesting for those additional founders? So you would still have to pay the filing fees regardless.

    BTW your blog is awesome. It is definitely useful when entrepreneurs can get some basic knowledge on these topics so that we can tell which lawyers are worth speaking to.

    Thanks,
    Haryen

  6. I set up a corporation with a pool of 10M shares. I am taking in some startup investment for 7% of the company in shares. I was thinking of issuing the founders(2) 50% i.e. 2.5 million shares each and leaving 50% of the shares available in the pool. What amount should I issue for the 7%.

  7. Hi Ryan,

    The ratio of issued/authorized shares seems to have a direct effect on the DE Franchise tax. For example, issuing only 100k shares total out of 10mm authorized would result in having to pay DE $350 for every $10k in gross assets (under the assumed par value capital method). Issuing 5m (half of authorized) would reduce this to $350 for every $500k in assets.

    Is my understanding correct? If so, how would you recommend dealing with the tax implications? Authorizing less incurs transaction costs when more shares are needed, authorizing more results in a potentially higher tax burden. Any suggestions?

  8. Let’s say you issue 55% to founders and 20% to an option pool. Your plan is to bring on a co-founder and give him or her most or all of the remaining 25%.

    Now, say you end up moving forward without ever adding the additional co-founder. What happens to those issued but unallocated shares? Is it possible for the founders to later allocate them to themselves? If so, are there common events to anticipate after which they could not allocate the “floating” shares to themselves?

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