Authorized Shares: Everything You Need to KnowStartup Law ResourcesIncorporateVenture Capital, Financing
Authorized shares are the number of stock a company may issue to investors or employees at incorporation or later based on the Articles of Incorporation. 4 min read
2. Why Is Getting the Number of Authorized Shares Right Important?
3. What Should I Consider When Determining Authorized Shares?
4. What Are the Dangers of Too Few Authorized Shares?
5. Frequently Asked Questions About Authorized Shares
6. Comparison Chart
7. Helpful Forms
Updated November 10, 2020:
What are Authorized Shares?
Authorized shares are the number of stock shares a company may issue to investors or employees at the time they incorporate and stock shares that the company board of directors may issue later as specified in the Articles of Incorporation.
Why Is Getting the Number of Authorized Shares Right Important?
Authorized shares can be issued when a company asks for financing. They may also be issued as a benefit for key employees. Usually, the number of shares that are authorized is much more than what is actually needed. This is to allow the company to issue stocks in the future when needed (as employee perks or perhaps as a secondary offering to raise more money). A company may refrain from issuing all of its authorized shares to maintain a controlling interest in the company and therefore prevent a hostile takeover.
The number of authorized shares can be changed by shareholder vote.
What Should I Consider When Determining Authorized Shares?
There are numerous things to consider when determining how many shares of stock to authorize. Some of them include:
Number of Business Principals – how many people are involved in the business and what number of shares might you consider giving them?
Future Funding Needs – authorized shares may be converted to issued shares by a board of director's votes. Therefore, you should make sure you consider how many shares you will want to issue to lending partners in the future.
Future Key Employee Perks – offering shares to a potential employee is a good way to attract the talent your business will need. This is one of the considerations when determining what number of shares to authorize.
What Are the Dangers of Too Few Authorized Shares?
There is very little downside to not providing sufficient authorized shares; however, if you do have to increase the number of shares later, you will have to redraft and modify your articles of incorporation. Remember, there is no limit to the number of shares you may authorize at the time of incorporation.
Frequently Asked Questions About Authorized Shares
- What is authorized share capital?
Authorized share capital is a broad term. It is used to describe every stock share a company could issue. Typically, this is divided into three categories.
- Paid-up Capital – these are shares issued in return for payment received from shareholders.
- Subscribed Capital – shares a company has a commitment from shareholders to purchase in the future.
- Issued Capital – shares the company has issued to various shareholders including founders, employees, etc. This includes shares sold publicly to generate capital and stock given to insiders as compensation. A company can issue a share only once. (Although investors can then sell to someone else). When companies buy back their own shares, those shares are still considered issued because the company can resell them later.
- How many shares should I authorize?
Remember there is no limit to the number of shares that may be authorized. In most cases, it is a good idea to authorize a high amount like 10,000,000. Typically, it's a good idea to limit yourself to a single class of stock versus multiple share classes. One thing to keep in mind is share dilution, which may occur whenever the company issues new shares on public markets. This is basically a reduction in the ownership percentage of stocks due to new shares being issued. An increase in outstanding shares means each existing stockholder owns a smaller percentage of the company, making each share less valuable.
- What is Par Value?
The minimum price at which a start-up can issue shares of stock. For example, if you issue 10,000,000 shares of stock with a par value of one-cent the founders would have to pay $10,000 for those shares.
- What is the issuance of stock?
Stock becomes issued when it is given when a company gives stock in return for financing, or when stocks are used as an incentive for an employee. Stock issuance occurs whenever authorized shares are issued to a shareholder; the shareholder may be an insider or a member of the public.
- What is the difference between shares issued and outstanding shares?
Authorized shares are the maximum number of shares the corporation is legally permitted to issue, outstanding shares are the number of shares the corporation has actually issued that are held by shareholders. The number of outstanding shares is set by the investment bank which implements the initial public offering, but that number can increase due to secondary stock market offerings or payment of employee stock options. When a company repurchases its own stock the outstanding shares decrease. Outstanding shares cannot exceed total authorized shares. Note that shares held by the company itself are called treasury stock. They have no voting rights.
Includes treasury stock
Excludes treasury stock
Helps with setting stock value
Used to determine ownership percentage. Also determines how the earnings of the company and paid dividends are divided.
Reported on financial documents
Not reported on financial documents