Deciding on the number of shares a startup should authorise at incorporation means striking a balance between providing enough granularity for employee grants while leaving room for an option pool and future investors without needing an amendment. It's common for startups to authorise 10 million shares at incorporation because that figure leaves room to manoeuvre but is low enough to keep franchise tax manageable.

The right number of shares for a company depends on how many founders are splitting equity, how fast the business plans to hire, and how soon it expects to raise a priced round.

Below, we'll cover what authorised stock means, which document sets that number, and why 10 million shares is often the default.

Key takeaways

• Authorised shares represent the maximum number a company's charter permits it to issue, not the number held by anyone

• The certificate of incorporation is the only document that sets the number of authorised shares. Changing it later requires a formal amendment.

• The authorised share count affects franchise tax, option pool sizing, and how easily a company closes its first priced round

What is authorised stock?

Authorised stock is the maximum number of shares a corporation's charter permits it to issue. The authorised number represents legal capacity, not distribution – the company doesn't have to issue every authorised share.

This gap is important for:

• Option grants: New employees who join after formation often receive equity as part of their compensation

• New investors: New shares are issued when a company raises a priced round and sells preferred stock

• Additional founders: New shares are issued if someone joins the company after the initial filing and needs an equity stake

Which document determines the number of shares authorised?

The certificate of incorporation filed with the state sets the maximum number of shares authorised. Changing that number later requires a certificate of amendment, which typically needs board approval followed by a shareholder vote before the state accepts the filing.

Founders who set their authorised count too low often find out during their first priced round, when a term sheet calls for more shares than the charter allows for. Amending the charter adds a step and a filing fee.

How many shares should a startup authorise at incorporation?

Ten million shares is a common starting point for C corporations and is the default many formation services use when setting up a company.

A few factors can push founders away from that default number:

• Founder count and equity split: More founders can mean a larger share count will help avoid awkward fractional splits when dividing equity across three or four people instead of one or two

• Hiring plans: A company planning to hire several employees within its first year sometimes authorises extra shares up front to avoid amending the charter before it has any revenue

• Outstanding simple agreements for future equity (SAFEs) or convertible notes: These instruments are designed to convert into new shares when a priced round closes. Other events, such as an acquisition or a note's maturity date, can also trigger resolution. A company expecting several outstanding notes might authorise more shares up front.

How do authorised, issued, and outstanding shares differ at formation?

Authorised, issued, and outstanding shares describe different stages of the same pool of shares.

Authorised shares are the ceiling set in the charter. Issued shares are the shares a company has distributed, whether that's a founder receiving restricted stock or an employee exercising a vested option. Outstanding shares are the issued shares held by all shareholders, excluding shares the business has repurchased and holds in its treasury.

For example, consider a startup that authorises 10,000,000 shares. At formation, its two founders might receive 8,000,000 shares total, issued immediately. The remaining 2,000,000 shares stay authorised but unissued, held in reserve for the option pool and future investors.

As the company grants options and sells preferred stock, more of that unissued pool becomes issued and outstanding. But the total authorised number doesn't move unless the board and shareholders approve a change.

How does your authorised share count affect equity and fundraising?

The authorised count sets the limit on how large a company's option pool can be without amending its charter. Founders sometimes worry that a large authorised number dilutes them, but authorisation by itself doesn't do that. Dilution happens when new shares get issued to option holders or new investors. A share sitting unissued in the authorised pool doesn't change anyone's percentage until it moves into someone's hands.

This matters at fundraising time, though. When a startup raises a priced round, investors usually expect the option pool to be refreshed before their money comes in. If the authorised count doesn't leave space for that refreshed pool plus the new investor's shares, the company must amend its charter as part of closing the round.

How does your authorised share count affect taxes?

Your authorised share count drives franchise tax in states that have one. Delaware, for example, calculates tax under two methods.

The authorised shares method bases tax directly on how many shares are authorised: US$175 for 5,000 shares or less, US$250 for 5,001 to 10,000, and an additional US$85 for every 10,000 shares (or fraction of that) above that. The maximum annual franchise tax is US$200,000.

The assumed par value capital method calculates tax based on total assets and issued shares. For an early-stage company with few assets and a small number of shares issued, that typically produces a much smaller bill.

What should you consider when setting authorised shares?

As you consider how to raise capital, a few questions can help you find a workable number before filing.

Assess:

• Anticipated fundraising rounds: How many priced rounds does the company expect before an exit or acquisition? Roughly how much dilution is likely at each stage?

• Employee equity programme size: Will the company build a large option pool early to compete for hires or keep it lean now and expand the pool at the next round?

• Future ownership structure: Do the founders expect to add cofounders, advisors, or a separate class of stock later? Does the current number leave room for that?

• Future amendment costs: Amendments require board approval, a shareholder vote, and a state filing fee. Will it be cheaper to authorise slightly more now or to amend when needed?

• Tax exposure: Does your authorised count set you up for higher franchise tax?

Stripe Atlas generates your incorporation documents as part of forming a company. The initial authorised number gets locked in alongside the rest of the incorporation paperwork rather than treated as a separate decision made later.

How Stripe Atlas can help

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