How Many Shares Should You Authorize in Your Certificate of Incorporation? A Startup’s Complete Guide

1. Introduction

When incorporating, one of the first strategic decisions founders face is setting the number of authorized shares in the certificate of incorporation. Authorized shares define the maximum stock your company can issue, directly affecting fundraising flexibility, employee option pools, corporate housekeeping, and even state franchise taxes. Choose wisely up front—amendments can be costly and time-consuming.

2. Key Definitions

• Authorized Shares: The total number of shares the corporation may legally issue as per its charter.
• Issued Shares: Shares actually granted or sold to founders, investors, or employees.
• Outstanding Shares: Issued shares currently held by shareholders, excluding treasury shares.

3. Factors Influencing Authorized Share Count

3.1 Future Fundraising Rounds

Every financing round—seed, Series A, B and beyond—requires issuing new shares. Authorizing too few can trigger charter amendments before each round, incurring legal fees ($1,000–$2,500 each in many states). Plan a buffer of 20–30% above anticipated needs.

3.2 Employee Option Grants & Reserve Pools

Equity compensation drives startup recruiting and retention. Common practice: reserve 10%–20% of authorized shares in an option pool. For a 10 million-share charter, a 1 million–2 million–share pool is typical. Forecast future hires and hikes to set an initial pool.

3.3 Par Value & Franchise Tax Trade-Off

Par value—a statutory minimum share price—impacts state taxes. In Delaware, the annual franchise tax can be computed via two methods:

• Authorized Shares Method: Based on total authorized shares. E.g., 10,000,000 shares ⇒ ~$85,165 tax. (CooleyGO)
• Assumed Par Value Capital Method: Based on issued shares and gross assets. E.g., 10,000,000 auth. shares, $0.0001 par, 5,000,000 issued, $1 M assets ⇒ $800 tax. (Wyrick Ventures)

Setting a low par value (e.g., $0.0001) lets you leverage the Assumed Par Value method and minimize taxes. (UpCounsel)

3.4 State Law Defaults & Filing Fee Thresholds

Some states cap filing fees based on authorized share bands. E.g., California fees jump at 5 million, 10 million, 75 million shares. Check your domicile’s thresholds to avoid surprise fees.

4. Typical Ranges & Benchmarks

• Common Authorization: 1 million–10 million shares for early-stage startups.
• 10 million Shares: Popular choice—simple math, easy percentage allocations, investor comfort. (trustfinta.com)
• 75 million+ Shares: Used when par value is set to $0.01 or higher to control franchise tax in high-fee states.

5. Best Practices & Practical Tips

• Authorize Ample Cushion but avoid excessive dilution risk—20% above forecast financing and option needs is prudent.
• Low Par Value Strategy: Set par at $0.0001 to unlock lower tax computations. (UpCounsel)
• Forecast Option Pool Drain: Project hires and refreshes for 18–24 months to size pool accurately. (LTSE)
• Monitor Amendment Triggers: Charter changes often require board & shareholder approval—time these with major corporate actions.
• Document Early & Update Regularly: Keep a live cap table to track issued vs. authorized and anticipate reauthorization needs. (DLA Piper Accelerate)

6. Amendment Considerations & Costs

Amending authorized shares typically involves:

• Drafting and approving board resolutions
• Obtaining shareholder consent (often 2/3 vote)
• Filing amended charter—state fees ranging $100–$500
• Legal fees: $1,000–$3,000 each amendment

Minimize these by planning ahead and grouping corporate actions.

7. Sample Scenarios & Illustrations

Scenario A: Pre-Seed Startup

Authorized: 5 million shares
Issued: 1 million
Option pool: 10% (500,000 shares)

Scenario B: High-Growth Startup

Authorized: 10 million shares
Issued: 3 million
Option pool: 2 million (20%) with 18 months runway

8. Actionable Recommendations & Checklist

• [ ] Estimate total financing needs and option pool size (20–30% cushion)
• [ ] Choose authorized share band to optimize state fees
• [ ] Set par value at $0.0001 for tax efficiency
• [ ] Draft charter reflecting these numbers and get counsel review
• [ ] Incorporate and file initial charter in domicile
• [ ] Monitor cap table, plan reauthorization before stocks run out

9. Conclusion

Selecting the right number of authorized shares is a foundational step in corporate setup. Balance growth flexibility with tax and legal efficiency, and you’ll avoid costly amendments and foster a cap table that supports fundraising, hiring, and long-term success.