Startup Shares | Authorized Shares | How many?

These are very common questions from our clients that are in the process of either starting their company or looking for advice on share(s), structure, and compensation in equity. 

What are authorized shares?

Part of the Incorporation process is filing a Certification of Incorporation with the Secretary of State. In this document, companies list the number of shares that they would like to start with. Typically, this number is low between 10-20 million; enough to address Startup's needs for 6 months to 2 years. Timelines are unimportant here. As we have seen and experienced, Startup arena is wild and full of surprises. Some companies gain traction and experience growth quicker than others; changes are quick in such companies. The reason for this digression is that if you are experience fast growth or are in a fast growth industry, things may have to be done a little differently. For one, Instead of starting with just a single class of stock, as most Startup's do, you may want to consider multiple classes of stocks. 

How many shares should a Startup authorize?

For a typical Startup, we recommend 20 Million shares. This amount is usually enough to carry on with daily needs, hire employees, seek initial investment. To be honest, the number of shares authorized is not important, but you still need enough of it to pass around. If your company is only authorizing 10,000 shares, there might not be enough to go around. Though you can always add to the pool, but you want to minimize such administrative tasks as much as possible in the initial stages.
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The number of shares authorized will not affect the overall value of the company. Investors use a formula to value your company, and the number of shares does not make a difference to the valuation, it only affects the value of each share at that point in time. Remember, Board of Directors can authorize additional shares at any time in the future without investor approval.

Startup's have options when it comes to authorizing shares, series and allocation. I highly recommend you flush out your concerns and discuss your options with an attorney.