How Many Shares Should You Authorize When Incorporating Your Startup? An Insightful Guide (2024)

FAQs

How Many Shares Should You Authorize When Incorporating Your Startup? An Insightful Guide? ›

How Many Shares a Startup Should Issue to Founders. Most startups authorize 10 million shares in their certificate of incorporation.

While there is no magic number that suits every startup, many companies find that authorizing around 10 million shares strikes a good balance between flexibility, employee motivation, and attracting investors. This is the number investors typically expect to see.

Regardless of your initial funding, a new startup's sweet spot is usually 10 million authorized shares. However, just because 10 million shares have been approved does not indicate that all or even the majority of them should be allocated or granted to founders or thrown into the employee stock option pool immediately.

A Popular Starting Point: 10 Million Shares

Typically, founders might initially issue themselves between 6 and 8 million shares, 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.

The number of authorized shares is specified in the company's articles of incorporation. You can also see the number in the capital accounts section on the balance sheet.

In simple terms, the number of shares you issue when you form a company should be determined by how many shareholders the company has or plans to have. If you're going to be the only shareholder, you only need to issue (allot) one share to yourself.

There is no minimum number of shares that must be authorized in the articles of incorporation. One or more shares may be authorized. However, the corporation may not sell more shares than it is authorized to issue and it must receive consideration in exchange for its shares.

When the founders have agreed on the ownership percentages (i.e. percentage of common shares issued), they can then determine how many shares in total to issue. This number is usually kept small at the beginning, e.g. 100 or 1000. This number can be "split" (multiplied by 2, 10 or whatever) as required.

Equal splits.

Whether they are 50-50, 33-33-33 and so on, equal splits remain the most common type of arrangement among startup founders.

Stocks are most commonly sold in round lots, or lots of 100 shares or more. A lot of less than 100 shares is called an odd lot; odd lot transactions generally have greater commission costs associated with them. Financial professionals advise having enough money to buy a round lot of shares in one company.

Can an LLC own shares of itself? ›

The simple answer is that there's no stock within an LLC. LLCs have Members or owners that can be other individuals or companies. Ownership is typically reflected within percentages or units that can be listed within the internal LLC Operating Agreement.

The short answer: Limited liability companies (LLCs) do not have stock, nor can they issue stock. While corporations that issue stock have corporate shareholders or stockholders, LLCs have membership interests, sometimes referred to as membership units, that confer an ownership stake on members.

The authorized share structure refers to the kinds, classes and series of shares that a company is authorized to issue.

For example, if a company has 1 million authorized shares, it might only sell 500,000 of the shares during its initial public offering (IPO). The company might reserve 50,000 of authorized stock as stock options to attract and retain employees.

Authorized stock plays an important role in acting as a limiting device against the ability of the management to issue additional shares that may alter the balance of control of the shareholders.

In stocks, a round lot is considered 100 shares or a larger number that can be evenly divided by 100. In bonds, a round lot is usually $100,000 worth. A round lot is often referred to as a normal trading unit and is contrasted with an odd lot.

You issue as many shares as the company needs to issue in order to raise the necessary capital. So if the company needs to raise one million dollars you would issue one million shares.

A limited liability company (LLC) cannot issue shares of stock. An LLC is a business entity structured to have either a single or multiple owners, who are referred to as the LLC's members.

The number of authorized shares per company is assessed at the company's creation and can only be increased or decreased through a vote by the shareholders. If at the time of incorporation the documents state that 100 shares are authorized, then only 100 shares can be issued.