Start With the Basics: What Authorized Shares Actually Do (and Don’t Do)
When incorporating, founders must set authorized shares very early — often before fundraising, hiring, or a clear cap table exists.
A low or awkward count can force charter amendments, delay financings, raise franchise-tax exposure, or leave a messy cap table that deters investors.
This practical guide gives founders and in-house counsel step-by-step checks to balance future fundraising, employee-equity and option-pool needs, tax costs, and state-law tradeoffs.
It's pragmatic, not jurisdiction-specific legal advice — consult counsel for state or tax questions.
Preview: understand concepts → map fundraising and option-pool needs → check state tax rules → pick a reasonable baseline → plan for increases.
Start With the Basics: What Authorized Shares Actually Do (and Don’t Do)
- Authorized shares: the maximum number the company may issue under its certificate of incorporation.
- Issued shares: shares actually granted to founders, investors, employees, or others.
- Outstanding / fully diluted: outstanding = issued; fully diluted = outstanding plus options, warrants, and convertibles. See plain-English guide.
Authorized shares don’t change ownership percentages or valuation by themselves — dilution happens when shares are issued. They matter because you can’t issue or reserve more shares than authorized; running out requires a charter amendment, shareholder approval, and state filing, which can delay financings. For practical steps to fix that, see how to increase authorized shares.
Mini-example: Delaware C‑corp authorizes 10,000,000 shares, issues 6,000,000 to founders and reserves 2,000,000 for an option pool — 2,000,000 remain available for future grants without an amendment.
Understand the Standard Startup Pattern (and Why 10 Million Shares Is So Common)
Most early‑stage Delaware C‑corps authorize 10,000,000 common shares at formation. That number is a familiar default to investors and counsel and reduces friction during fundraising.
- Operationally convenient: you can grant meaningful option sizes (e.g., 100k–250k) without awkward fractions.
- Built‑in buffer: 10M typically leaves room for an initial option pool and a seed round without an immediate charter amendment.
Baseline cap table (example): 10,000,000 authorized; 6,000,000 issued to founders; 2,000,000 reserved for options; 2,000,000 unallocated. Pre‑seed fully diluted = 8,000,000 (founders 75%). If a seed investor buys 2,000,000 shares, fully diluted becomes 10,000,000 (founders 60%, investor 20%).
When to deviate: if you’re a tiny, closely held business not seeking institutional capital; if your state’s franchise‑tax rules make large authorizations costly; or if you need a much larger multi‑class or high‑volume share structure.
Map Your Future Fundraising and Investor Expectations Before Locking in a Number
Step 1 — Sketch an honest roadmap: list likely rounds (pre‑seed, seed, Series A) and the approximate dilution founders can tolerate. You don’t need perfect precision — just a realistic path that guides share‑count planning.
Step 2 — Translate roadmap into share needs: model target investor ownership as share counts using a 10,000,000 baseline: pre‑seed 10–20% → ~1,000,000–2,000,000 shares; seed 15–25% → ~1,500,000–2,500,000; Series A 20–30% → ~2,000,000–3,000,000. Make sure your authorized ceiling covers expected issuances plus option‑pool expansions between amendments.
Step 3 — Factor investor and counsel norms: many VCs expect a standard Delaware C‑corp structure (commonly 10M authorized). Unusually low or odd counts can trigger diligence questions and slow a deal.
Example: a company that authorized only 1,000,000 shares, issued 800,000 and reserved 150,000 for options, quickly ran out of room and needed a charter amendment before a seed close — a larger initial authorization would have avoided the delay. For cap‑table mechanics see cap tables and for remedies see increasing authorized shares.
Size Your Option Pool and Work Back to an Authorized Share Count
Option pools matter because employee, advisor, and director options are granted from reserved (unissued) shares. Venture-backed companies typically target a 10–20% pool on a fully diluted basis.
Estimate an initial pool: map hires (1–2 executives, early engineers, first sales) and convert to percentage/share counts — e.g., 15% of a 10,000,000 baseline = 1,500,000 options.
Investor interplay: many investors require the pool to be increased pre‑money (so founders absorb the dilution). That means your authorized shares must cover both the new investor shares and any pool expansion. See Promise Legal’s guidance on understanding option pools and practical cap‑table mechanics in cap tables.
Example: founders 6,000,000 + pool 1,000,000 = 7,000,000. If a seed investor buys 2,000,000 and requires a 15% post‑money pool, desired pool = 0.15×9,000,000 = 1,350,000 → need +350,000 options. Authorized shares must cover 9,350,000 total.
Practical rule: choose an authorized count that comfortably accommodates your initial pool plus at least one expected expansion without an immediate charter amendment.
Don’t Ignore State Law, Par Value, and Franchise Tax Implications
Where you incorporate changes the tax and fee math. Delaware is the common choice for venture startups, but some states scale filing fees or franchise taxes by authorized shares and par value — so the same share count can have very different cost outcomes.
Delaware offers two computation methods (Authorized Shares vs. Assumed Par Value). Startups typically use a very low par value (e.g., $0.0001) and the assumed‑par‑value method to reduce franchise tax exposure — see our Delaware incorporation guide.
In other states, authorizing 50,000,000 instead of 10,000,000 can trigger materially higher annual taxes or minimum fees and erode runway for an early company.
Practical rule: confirm state rules and par value with incorporation counsel and a tax advisor before filing; if you need more shares later, professionals can assist with increasing authorized shares, but expect legal fees and timing risk.
Plan for Flexibility: When and How You Can Increase Authorized Shares Later
Your first authorized count isn't final — the board and stockholders can approve an amendment to increase shares, often bundled with a financing.
Typical steps: board approval; stockholder approval (written consent or meeting) subject to voting and protective provisions; file the amended certificate with the state and pay fees.
Costs/timing: legal/filing fees, possible franchise‑tax effects, and delay risks for financings.
Example: a startup with only 5,000,000 authorized that issued most shares scrambled to approve an increase before a priced round, delaying the close.
Practical takeaway: authorize enough to avoid a standalone amendment before your first 1–2 priced rounds; plan to adjust later and consult counsel — see Promise Legal’s guide to increasing authorized shares.
A Simple Framework to Decide Your Authorized Share Number
Step 1 — State and tax sensitivities: pick your likely state (Delaware is common) and confirm whether authorized counts or par value affect franchise taxes or fees; see our Delaware incorporation guide here.
Step 2 — Baseline: for Delaware venture startups a 10,000,000 common baseline at a low par value is typical; smaller, non‑venture companies can consider 1,000,000–5,000,000.
Step 3 — Model: use a spreadsheet or cap‑table tool to test founders + option pool (10–20%) + expected seed; if you hit the ceiling, increase authorized shares before filing — see our cap‑table primer.
Step 4 — Sanity check: run the plan past incorporation counsel and a tax advisor, and get bespoke advice for multi‑class or unusually large equity grants.
- Checklist: decide state of incorporation.
- Confirm par value and franchise tax impact.
- Model founders, pool, and first round on a cap table.
- Ensure authorized shares exceed modeled need + buffer.
- Have counsel and tax advisor review before filing.
Quick FAQs on Authorized Shares for Startups
- Q1: Is 10 million authorized shares always the right answer? No — it’s a common Delaware VC default because it’s operationally convenient, but small non‑VC companies or those in states with sensitive tax rules may pick fewer. Consult counsel; see our Delaware incorporation guide.
- Q2: Does authorizing more shares dilute my ownership? No — dilution occurs when shares are issued. Ownership is driven by issued or fully diluted percentages. See the plain‑English primer on issued vs fully diluted.
- Q3: Can I reduce authorized shares later? Yes, but like increases it requires board and stockholder approval and state filing. More often companies increase rather than decrease; see our guide to increasing shares.
- Q4: How does the option pool relate? Options are reserved from authorized but unissued shares; the pool is typically 10–20% fully diluted. Read about option pools and cap‑table mechanics.
- Q5: Do investors care? Investors focus on ownership percentages and the ability to issue needed shares without delays; unusual or tiny authorized counts can signal inexperience or trigger tax/diligence issues. See our cap‑table primer.
Actionable Next Steps
- Decide your likely state of incorporation and confirm whether franchise taxes or fees make large authorizations costly.
- Sketch a 2–3 round fundraising roadmap and the founder dilution you can tolerate.
- Model founders + option pool (10–20%) + first financing on a cap table; test a 10,000,000 baseline or alternatives — use a cap‑table template: https://promise.legal/templates/cap-table-template.
- Confirm par value and tax implications with incorporation counsel and a tax advisor.
- Have your incorporation lawyer review and finalize the authorized share number before filing; set a calendar reminder to revisit the structure before major hires or priced rounds.
Want help? Ask Promise Legal to review your draft certificate or cap table. A clean, flexible equity setup prevents delays and unexpected costs.