Authorizing and Issuing Shares
After a technology startup has been legally formed as a corporation, shares of its capital stock need to be authorized and issued to its founders. At formation, a corporation authorizes a certain number of shares of stock, and typically a subset of that authorized stock is issued to the founders (with the remaining authorized shares left as authorized but unissued shares of the corporation).
Although each situation is different, we tend to see technology startups authorize about 10,000,000 shares of common stock at incorporation, with about 8,000,000 shares of that common stock issued to the founders, about 800,000 to 1,600,000 shares of common stock reserved for issuance under the equity incentive plan; and any remaining shares left as authorized but unissued shares of stock of the corporation. The shares that remain in the corporation’s reserve of authorized but unissued shares may be issued at any later date upon approval by the corporation’s board of directors.
We sometimes see founders spend way too much time thinking about how many shares to authorize and issue at formation. Mathematically, it generally doesn’t matter if a corporation has authorized and issued 1,000,000 shares or 100,000,000 shares at incorporation. The more important issue is how the shares that are issued are divvied up among the founders and the equity incentive plan (if any). As discussed above, this normally breaks down to about 80% of the authorized shares to be issued to the founders and between 10% and 20% of the total number of issued shares to be reserved under the equity incentive plan.
The number of shares that a corporation authorizes at incorporation is not set in stone, and can be increased or decreased over time with amendments to the company’s articles of incorporation (but note that decreasing the number of authorized shares below the number of shares that are issued at the time of such decrease requires some special corporate maneuvering). As a corporation engages in preferred stock financings over the course of its lifecycle, or otherwise needs to authorize more shares (and/or different classes of stock), the corporation’s board of directors and stockholders can authorize amendments to the articles of incorporation to increase the number of shares authorized and create the new classes of preferred stock.