How Many Shares Should My Corporation Authorize and Issue?

Sample certificate showing number of shares owned by a corporation's shareholderThis post discusses the number of shares that a corporation should authorize, and the number of authorized shares that a corporation should issue.

On a couple of occasions, I have worked with founders whose corporations (prior to retaining me) issued a small number of their authorized shares.

In one instance, four founders formed a corporation that was authorized to issue 50,000 shares, but had issued (to themselves) fewer than 400 of those shares. They asked me to help reallocate shares among them because, as time had passed, they saw that their respective contributions to the business differed from what they initially had expected.

We needed to avoid any purchase and sale of shares for tax reasons. I prepared a voting rights agreement by which two of the founders gave a portion of their voting rights to the two other founders. Because the number of shares issued was so small, we had to express the transferred voting rights in terms of unusual fractional portions of shares to achieve the desired allocation.

In a more recent situation, the sole founder created a corporation with 1,000 authorized shares but issued only one share to himself. The founder wants a friend to invest funds in exchange for ten percent of the equity. This presents a somewhat awkward situation, in that the straightforward way to to accomplish the desired end (without changing the founder’s current share ownership) would be to issue the investor 0.11 share (a small fraction of one share).

There are ways to make the arithmetic somewhat more palatable, such as first having the founder acquire more shares, or having the corporation split its shares. However, the former may have undesirable accounting or tax implications (which are being researched), and the latter would incur legal fees and expenses that could have been avoided if appropriate legal counsel had been sought up-front.

So, how many shares should be authorized? I typically have my clients’ corporations authorize 10,000,000 shares. (Caveat: If you are forming a Delaware corporation with a large number of shares, be sure to specify a low par value, such as $0.0001 per share, to avoid having to pay excessive annual fees to the state. See In Delaware, No-Par-Value Can Cost a Bundle.) There are two reasons for the large number of shares:

  • To allow plenty of flexibility in allocating shares among founders and other shareholders.
  • To make employees or contractors who receive shares or options feel like they have received something of greater value. I realize this is a bit silly, but an individual will be more impressed receiving 10,000 shares rather than 100 shares, even if, in both instances, the number of shares represents the same percentage of ownership.

And how many of the authorized shares should be issued to the founder(s)? I find this varies among clients, but typically is between 50+% and 100%. Toward the low end of the range, the founders can maintain voting control while having many shares reserved for investors, employees and contractors. The high end of the range is appropriate for founders who expect never to have to share their equity interests with anyone.

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Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

7 comments

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  2. Luis says:

    Hello,

    I am trying to incorporate but I have some doubts.

    When first incorporating, my partner and I will have, for example, 500 shares each. And a total authorized number of shares of 2000. The value of each share would be $20

    Does that mean that, once the corporation is formed, we will have to pay to the company $1000 each of us??… if the answer is yes, now I understand why this client of yours only had 1 share of 4 hundred.

    Thank you, and nice blog!!

    • Dana says:

      While details vary from state to state, each shareholder would be required to contribute cash or other consideration with a value of at least $1,000.

  3. jane says:

    Very nice blog indeed!

    I am considering forming a corporation in Texas, and online business. Questions:

    1. Is your suggestion of 10,000,000 at $0.0001 par value per share good numbers to go in Texas?

    2. If so, and if the corporation issues 51% of the stock to me as the sole founder, would I need to put into the new corporation $510 (51% of 10,000,000 x $0.0001), or $1000 (100%)?

    3. When would I need to put in the money?

    Thanks!

    • Dana says:

      Re-emphasizing that this exchange does not establish an attorney-client relationship and does not constitute legal advice:

      1. The number of shares and par value are acceptable for a Texas corporation.

      2. The minimum capital contribution in your hypothetical would be $510 pursuant to the calculation that you provided.

      3. Simplified a bit, the sequence of events for issuing shares is: The board approves issuing a specified number of shares to a specified shareholder for specified consideration; the shareholder pays the consideration, which is deposited into the corporation’s bank account; the corporation issues the shares to the shareholder.

  4. chris says:

    Based on your recommendation to authorize 10 million shares, in California if I’m the sole founder, and plan on getting investors involved but want to maintain as much control as possible, does that mean I issues 5,100,000 shares to myself to maintain 51% voting/ownership?

    It seems to get more complicated when investors get involved. Would they invest at the same value of what the shares are I issued to myself?

    • dhshultz says:

      1. What counts is the number of shares issued to each shareholder; the relationship of those numbers to the number of authorized shares is meaningless (other than that the number of issued shares cannot exceed the number of authorized shares). So, for (a somewhat silly) example, if the founder holds 9 shares and the investor holds 1 share, then the founder holds 90% of the issued shares and (so long as all shares are of the same class) has effective control over the corporation.

      2. Investors typically pay more for their shares than the founder does.