Have you ever wondered how many shares you should authorize when incorporating your startup? Well, if you’re about to dive into the corporate world, or you’re in the midst of navigating the complexities of startup incorporation, this question will inevitably pop up.
Just like a parent deciding on a name for their newborn, you, as a founder, need to determine the number of shares your startup should authorize. While this might seem like a simple administrative detail, it can profoundly impact your startup’s future. So, let’s unravel the mystery and decipher the optimal number to authorize during your startup’s incorporation.
Understanding Authorized Shares
Before we delve into the number game, let’s define authorized shares. These are the maximum number of shares a company can issue. It’s a figure established in your Articles of Incorporation, and changing it later requires amending these articles – a process that can be both costly and time-consuming.
Determining the Optimal Number of Authorized Shares
Deciding on the number isn’t a one-size-fits-all scenario. It’s a strategic decision that relies on several factors, including your fundraising strategy, dilution preferences, future hiring plans, and potential for company growth.
1. Future Fundraising:
If you plan to raise capital from investors, you should authorize more shares. Investment rounds mean selling a percentage of your company in exchange for capital, which requires having enough authorized shares to accommodate these transactions.
2. Employee Incentive Programs:
Startups often use stock options to attract and retain talent. If you’re considering this strategy, you’ll need to set aside a portion of your authorized shares for an employee stock option pool, generally ranging from 10% to 20% of the total.
3. Anticipating Dilution:
Each time you issue more shares, the ownership stake of existing shareholders dilutes. By authorizing more from the start, you can mitigate the impact of dilution.
4. Regulatory Considerations:
Some states, like Delaware, tax corporations based on authorized shares. Hence, authorizing a large number of shares can increase annual franchise taxes.
A Popular Starting Point: 10 Million Shares
A commonly adopted starting point is to authorize 10 million shares. It provides flexibility for fundraising, hiring, and future growth. Typically, founders might initially issue themselves between 6 and 8 million, leaving the rest for future employees, advisors, and investors. However, this number is not set in stone and should be adjusted according to your startup’s specific needs.
Conclusion
In the end, the optimal number of authorized shares is unique to every startup. The process of determining this number is more art than science, involving strategic thinking and forecasting. Remember to consult with a legal or financial advisor who can provide guidance tailored to your startup’s situation and goals.
Understanding the importance of the number of shares to authorize is a crucial step in your entrepreneurial journey. It may seem like a minor technical detail, but it can significantly affect your startup’s growth trajectory. Incorporate wisely, plan strategically, and set your startup up for future success.
