There is often a misconception among startup founders that the number of shares of stock authorized by the company is the same thing as the total number of shares issued. However, what shares are “authorized” and which are “issued and outstanding” are actually two very different things.
What are authorized shares?
When I say the words “authorized shares” to my founder clients, what I’m referring to is the number of shares the corporation is allowed (i.e., authorized!) to issue under its articles of incorporation (which may also be described as a certificate of or charter of incorporation, depending on the state the company is incorporated in).
In most instances, particularly with our technology startup clients, we incorporate the company with anywhere from 10 to 15 million authorized shares. This general figure may vary depending on a variety of factors, such as the nature of the new business, ownership structure, anticipated capital and equity incentive needs, etc., etc., and you should discuss this issue thoroughly with your attorney before going through the time, trouble, and fees of forming your company.
What are issued shares?
On the other hand, when we say “Issued and outstanding shares”, we are talking about the number of shares that have been issued and are outstanding at a given time. This is an important action that is typically reserved to the Board of Directors of the corporation.
Just like you can’t give away more property than you actually have (in most cases anyway), the number of shares issued cannot be greater than the number of authorized shares. Thus, the number of issued and outstanding shares is usually in almost all cases less than the amount authorized.
A basic example
Let’s take the following example of two startup co-founders who have pre-determined their ownership breakdown at 55% to 45%.
Authorized shares: 10 million
Issued shares: 6-7 million (broken down as follows):
3.3 million to Founder 1
2.7 million to Founder 2
1-2 million reserved for “option pool” for key hires and consultants
Although only approximately 8 million has been issued, the two co-founders nonetheless own 75-85% of the issued and outstanding share base, which is all that matters from the standpoint of control of the company.
Founders who are considering incorporating (or who have recently incorporated) their startup should consider retain legal counsel as soon as possible to discuss this all too often misunderstood and ignored aspect of the startup formation process. In many instances, the advice of an experienced attorney can help avoid significant or costly delays related to corporate governance, hiring of key employees, and even availability of outside investor funding. To schedule a consultation with our Phoenix startup law firm, call our office today at (602) 222-5542 or send us an e-mail through the online contact form to the right.
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a startup, technology, and e-commerce law practice advising founders and management teams on company startup, corporate and technology transactions, e-commerce, as well as Internet privacy concerns. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. Our offices are conveniently located along the Camelback corridor in Phoenix’s financial district. For more information about our Company Startup practice, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.