Authorized Shares

Q: How many shares should a startup authorize at formation?

Standard practice is 10M-20M authorized common at formation, with founders issued 5M-8M and the rest reserved for option pool. Authorize enough headroom to avoid needing immediate amendments.

Ryan Rutan

Authorized Shares

Authorized shares is the maximum number of shares a corporation is legally permitted to issue under its certificate of incorporation. The ceiling is set at incorporation and amendable only through a charter amendment requiring board and stockholder approval, with standard practice being to authorize well above current issuance to provide headroom for future financings, option grants, and corporate transactions. It is the legal ceiling on share issuance, distinct from issued shares (actually issued) and outstanding shares (issued and not repurchased).

The structural layers of share counts:

Authorized shares: the ceiling set in the charter. Typically 10M-20M shares at formation for a standard Delaware C-corp, with significant headroom above expected initial issuance.
Issued shares: shares the company has actually issued to stockholders (founders, employees, investors). Cannot exceed authorized.
Outstanding shares: issued shares minus treasury shares (shares the company has repurchased and holds). At most early-stage startups, treasury is zero so issued = outstanding.
Reserved shares: shares set aside for specific purposes (option pool, warrants, conversion of convertibles) that count against authorized but are not yet issued.

Standard formation approach: at C-corp formation, the charter typically authorizes 10M shares (often all common, sometimes including a small preferred placeholder), with the founders being issued 5M-8M total (split across the founder team) and the remainder reserved for option pool. Why authorize more than you initially need: amending the charter to authorize additional shares requires board approval, stockholder approval (sometimes including specific class votes), and a filing with the Secretary of State. This is administratively expensive and time-consuming, especially at financing closings. Authorizing enough headroom at formation avoids needing amendments at every issuance event.

The recurring authorization headache: as the company raises priced rounds and creates new preferred series (Series Seed Preferred, Series A Preferred, etc.), the charter must be amended at each round to authorize the new preferred class. These amendments are routine at financings but require careful tracking of cumulative authorized counts. Concrete example: company formed with 10M authorized common. Series A at 3M post-money requires authorizing 3M Series A Preferred (charter amendment). Series B adds Series B Preferred (another amendment). By Series C, the charter typically authorizes 50M-100M total shares across all classes, with most still unissued.

Ryan's Take

Authorized shares is one of those terms that looks administrative and turns into a real problem if you don't manage it. The standard approach (10M-20M at formation, amendment at each priced round) works fine when corporate counsel is on top of it. The failure mode: option pool refresh at a priced round runs into the authorized share ceiling because cumulative grants plus the new option pool plus the new preferred series exceeds what was authorized at the prior round. The fix requires another charter amendment which adds complexity at closing. The discipline: authorize generously at each round (more than you think you need), track cumulative issuance against authorized, and surface the math early in financing prep so the charter amendment is part of the standard closing package rather than a last-minute scramble.

What founders get wrong: Not tracking authorized share counts against cumulative issuance over multiple rounds. By Series C or Series D, companies that haven't amended the charter generously can find themselves bumping against the ceiling, requiring last-minute amendments at closing. The right discipline: at every priced round, authorize enough headroom for the next round's expected option pool refresh and preferred issuance, plus margin. Corporate counsel should run the cumulative math and propose amendments that anticipate the next 1-2 rounds rather than just the immediate one.

FAQ

What are authorized shares?
The maximum number of shares a corporation is legally permitted to issue under its certificate of incorporation. Set at incorporation and amendable only through a charter amendment requiring board and stockholder approval. Distinct from issued shares (actually issued) and outstanding shares (issued and not repurchased).

How many shares should a startup authorize at formation?
Standard practice for a Delaware C-corp is 10M-20M authorized common at formation, with founders being issued 5M-8M and the rest reserved for option pool. Authorize enough headroom to avoid needing immediate amendments for initial grants and the first option pool.

How do authorized share counts change over time?
At each priced round, the charter is typically amended to authorize the new preferred class (Series Seed, Series A, Series B, etc.) and often to refresh the option pool. By Series C or D, the charter typically authorizes 50M-100M total shares across all classes, with most still unissued. The amendments are routine but require careful tracking of cumulative authorization.

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