When you incorporate your startup, you must authorize shares of common stock.
There is no limit to the number of shares you are allowed to authorize. However, entering an infinity symbol in your articles of incorporation is unlikely to win you friends at the Delaware Division of Corporations.
Below, we look at how many shares founders typically issue, and their reasons for doing so.
How many shares should I authorize?
Most startup founders who incorporate in Delaware choose to authorize 10,000,000 shares of common stock. While this is the most common amount, some founders authorize as few as one million shares. It’s uncommon to choose a number lower than this.
Why? It makes the math easy.
For instance: At this point, the value you assign to shares is more or less arbitrary. You can go ahead and purchase 10,000,000 shares for $1,000, and each share will be worth $0.0001.
Once purchased, you’ll distribute the shares amongst co-founders. It’s simpler dividing a multiple of 10 than it is a multiple of 3 or 7 or 8. (We’ll get to splitting up equity in a moment.)
When people join Capbase and authorize shares—a process which only takes a few minutes—we gently suggest authorizing 10,000,000, just to make the process simpler.
Depending on how you choose to calculate your Delaware franchise tax, having shares in excess of what your company needs could mean you end up paying extra in taxes. Learn more about how authorized shares affect your tax obligations with our guide to Delaware franchise tax.
How to allocate startup shares at formation
Let’s say you’ve done the sensible thing, and authorized 10,000,000 shares of common stock.
Now, how do you split up ownership of your company among your co-founders?
Typically, the split looks like this:
- 8 - 9 million shares are divided among co-founders
- One to 2 million shares are set aside for a company stock plan, to compensate employees, advisors, and consultants.
Example: Founders Bob and Doug incorporate their company, Strange Brew Crypto, and authorize 10,000,000 shares. As founders, Bob and Doug each get 4,000,000 shares. Another 2,000,000 is set aside for the company stock plan.
If Bob and Doug had a third co-founder, Mike, the split would look a bit different. In that case, the co-founders might each take 2,700,000 shares (a total of 8,100,000 founder shares), saving 1,900,000 more for the company stock plan.
In some cases, the founders of a startup may plan to bring on another founder in the future. In that case, they would take less themselves, and put the rest into a stock plan.
Example: Bob and Doug know they’ll need a third co-founder in the future—they just aren’t sure who or when, yet. So they each take 2,500,000 owner shares (5,000,000 total), leave 2,500,000 for a company stock plan, and set aside 2,500,000 unissued shares for a future founder.
Common questions about allocating startup shares
Q: What if I have more unissued shares than issued shares? How will that affect ownership?
A: When your company is brand new, and you haven’t issued preferred shares, ownership is entirely determined by issued shares of common stock. If the founders own all the common stock in their company, they have 100% control.
Q: Do co-founders always take equal shares in the company?
A: Not always. While it’s typical to split shares as equally as possible—in order to avoid arguments later on—the work of making a startup succeed isn’t always divided evenly among the founders. There are a lot of factors to take into account here—for a proper, deep dive, check out our article on how to split equity among co-founders.
Q: So, my company has authorized ten million shares. How much are they worth? Do I need a 409a valuation?
A: For the sake of transferring shares to founders without completely emptying their wallets, startups typically assign a low, arbitrary price, called the par value, to each share—for instance, $0.00001. Later on, you’ll sell stocks at fair market value (FMV). Our guide explains more about par value and FMV.
- It’s common practice to authorize 10,000,000 shares when you form your company (although this isn’t a hard and fast rule)
- In a typical split, 8 - 9 million shares are issued to co-founders, and one to 2 million are set aside for employee stock options
- When you first authorize shares, they’re set at par value—a more or less arbitrary value, assigned so they can be transferred inexpensively to founders
Written by Capbase Staff
Capbase is a team of designers, engineers, and business professionals spread across 6 time zones on 3 continents united by our passion for dogs, coffee, and great software.
Avoid these common legal mistakes made by startups and save your company from dealing with fines and lawsuits. As a startup founder, keeping your company compliant is essential to protecting the value of your startup equity and reaping the rewards of your hard work.