Starting a business comes with many decisions, and determining the number of shares to authorize for your corporation is one of them. This blog post clarifies the difference between authorized and issued shares and explains why 10 million shares is a common starting point for Delaware corporations.
Authorized Shares vs. Issued Shares:
- Authorized Shares: This is the total number of shares a corporation can potentially issue. It’s like a pre-determined pool of shares you can draw from.
- Issued Shares: These are the shares actually distributed to founders, investors, and employees. Owning these shares translates to ownership percentages in the company.
Why 10 Million Shares for Delaware Corporations?
Delaware is a popular state for incorporating businesses. Here’s why authorizing 10 million shares is a common practice:
- Flexibility: It provides enough shares for founders, investors, and creating an employee stock option pool (granting shares to employees or service providers).
- Future Growth: This allows for future needs like issuing shares to additional investors as your company grows.
Understanding Ownership Percentage:
The number of issued shares determines ownership percentages, not the number of authorized shares. For example:
- You authorize 10 million shares.
- You issue 6 million shares to founders (let’s say 60% ownership goal).
- The remaining 4 million shares stay in the authorized pool, not currently affecting ownership.
Key Takeaway:
The 10 million authorized share recommendation provides a buffer for future needs. The number of issued shares, not authorized shares, determines ownership percentages in your company.
Need Help Structuring Your Startup?
Determining the right share structure is crucial for your young company. Consulting with a business law attorney can ensure you make informed decisions about share authorization and issuance.
