September 13, 2023

How many shares should your startup authorize?

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As a startup founder, you might be grappling with the common challenge of determining the right number of shares to authorize. Luckily for you, the answer is pretty simple: 10 million. 

In this article, we'll explore in detail why 10 million is the number to authorize—all to help you make informed decisions for your startup's success.

Why most startups authorize 10 million shares:

While there is no magic number that suits every startup, many companies find that authorizing around 10 million shares strikes a good balance between flexibility, employee motivation, and attracting investors. This is the number investors typically expect to see. 

We'll go into a little more detail: 

10 million meets investor expectations

Most investors expect to see 10 million authorized shares. It communicates that you've considered the company's expansion potential, acknowledged the importance of incentivizing your team, and asserted your commitment by retaining a substantial ownership stake. 

Why? Because 10 million is a big enough number to ensure you have enough to issue compelling incentives to employees while leaving a substantial ownership stake to you, the founder, in order to secure future funding. 

10 million helps you stay flexible

It's always smart to consider practical issues like how easy it is to divide shares. That's why most business founders usually choose a number that can easily be split by ten. The number also needs to be large enough to issue small amounts of ownership — often in the hundredths of a percentage point.

For example, a company with only 1,000 shares can’t give any ownership worth less than 0.1% of the company’s total value.

10 million keeps employees motivated

At the heart of a successful startup lies a motivated and dedicated team. Authorizing 10 million shares allows a substantial portion to be set aside as employee stock options and incentives. What's important is not just having a large number of shares, like 10 million, but using them to correctly distribute employee stock options and incentives.

By granting various amounts of equity to employees, it aligns their interests with the company's growth. This strategy not only connects employees to the business's success but also creates a workforce committed to pushing the startup forward.

This not only aligns employees' interests with the company's growth but also fosters a workforce committed to driving your startup's success.

Authorized, allocated, and issued shares

Now, let's break down the types of shares available:  

Authorized shares

"Authorized shares" refers to the total number of shares a corporation can create under its articles of incorporation.

By keeping a stock of authorized but not yet issued shares, the company is able to quickly respond to future fundraising requirements and seize any chances for growth. This strategy also helps reduce the impact on existing shareholders by diluting their ownership only when the shares are truly created and distributed.

Allocated shares

Allocated shares have been earmarked for specific purposes but have not yet been issued.

They are typically set aside for employee stock options or other incentive programs.

Issued shares

Issued shares have already been transferred to stockholders. These could include founder shares, employee shares, and investor shares.

These shares determine voting rights and ownership stakes.

Key factors

Let's take a look at some factors to consider when deciding how many shares your startup should authorize:

Do you have enough to secure funding in the future? 

Having a sufficient number of authorized shares is crucial not only for accommodating future fundraising rounds but also for potential expansion endeavors. By ensuring you have a surplus of authorized shares, you preemptively avoid the time-consuming process of amending your articles of incorporation later on. 

This flexibility enables you to seize unexpected opportunities or swiftly respond to market changes, demonstrating the foresight that investors often value.

Are you issuing enough shares to keep employees happy?

Setting aside shares for employee stock options and incentives serves as a potent tool for attracting and retaining top-tier talent. This approach aligns the interests of your team members with the company's growth and success, fostering a motivated workforce that contributes to achieving your business objectives. 

By offering an ownership stake through stock options or restricted stock units, you not only enhance employee satisfaction but also bolster their commitment to driving the company forward.

Do you have enough equity to attract investors? 

It's key to strike a balance between retaining control over your company and offering a worthwhile stake to investors. Usually, allocating about 15–30% of the total shares to investors hits the sweet spot.

When determining the right allocation, consider factors like your industry's standards, projected growth, and investor preferences. This ensures funding infusion while safeguarding a substantial share for your team and personal interests.

Take control of your startup's future

Remember, determining the number of shares to authorize is just one piece of the puzzle when it comes to building a successful startup. Be sure to weigh the different factors we've discussed, such as flexibility in future fundraising endeavors, employee motivation, and attracting investors.

If you're struggling to figure out how many shares you want to authorize, Firstbase can help. Our team of experts can help you incorporate from start to finish. We'll also provide guidance on how to structure your company's equity so that it aligns with your startup's goals.

Key takeaways:

  • 10 million is the standard number of authorized shares that investors expect to see
  • Authorized shares provide flexibility for future fundraising and growth
  • Allocated shares are earmarked for specific purposes like employee stock options
  • Issued shares determine voting rights and ownership stakes
  • Allocate shares for employee stock options to attract and retain talent
  • Strike a balance between attracting investors and maintaining control as a founder

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