How many shares should my company authorize?
FormationCap tableDelawareEquity
Most startup corporations authorize 10,000,000 shares of common stock in the certificate of incorporation and issue somewhere between 5 and 8 million of them to the founders, leaving the rest unissued for the option pool and for grants the board has not thought of yet. Authorized shares are a ceiling set in the charter. Issued shares are the ones people own. The gap between them is deliberate, and it is not a gift to anyone: an unissued share belongs to nobody and counts toward nobody's percentage.
Why authorize more than you issue
Issuing shares within the authorized number needs a board consent. Issuing shares beyond it needs a charter amendment, which is a board vote, a stockholder vote, a filing with the state and a fee. A company that authorized exactly what it issued at formation would be amending its charter for its first advisor grant. Leaving room means the option plan and the early grants are one page of board consent each.
Why the number is so large
Optics and arithmetic. A one percent grant out of 1,000 authorized shares is 10 shares, which reads as an insult to the person receiving it. Out of 10 million it is 100,000 shares, and can be split into monthly vesting installments without fractions. Large counts also make the price per share small, which is what founders paying par value and employees paying an exercise price both want. Industries outside technology often authorize a few thousand shares; startups do not, for these reasons.
The Delaware franchise tax caveat
Delaware's default franchise tax calculation charges by authorized shares, and 10 million authorized shares produces a bill in the tens of thousands of dollars on the state's first notice. That number is not what you owe. Recalculating under the assumed par value capital method brings a small startup's tax down to the minimum, and every startup with millions of authorized shares files that way. Do not authorize fewer shares to avoid a tax you can calculate away.
Arabella's Delaware formation authorizes 10,000,000 shares of common stock at $0.0001 par value by default and issues to each founder the number you set in the questionnaire.
Related questions
Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.