Most startups authorize 10,000,000 shares of common stock at a par value of $0.00001 per share. That’s the convention investors expect, and it leaves room to issue founder stock, set aside an option pool, and keep a reserve without amending the charter. Preferred stock comes later, at the first priced round.
Key takeaways
- Authorize 10,000,000 shares of common stock at $0.00001 par value, in one class.
- Set aside an option pool at incorporation, typically 1,000,000 shares.
- Don’t issue all the authorized shares. Keep a reserve for a future co-founder or key early hire.
- You don’t need extra shares for SAFEs. They convert at the priced round, when the charter is amended anyway.
- File the Delaware franchise tax using the assumed par value capital method, or the bill will look enormous.
What are authorized shares and outstanding shares?
Authorized shares are the maximum number of shares the company can issue, as set in the certificate of incorporation. Changing that number means amending the charter, which needs board and stockholder approval and a filing with Delaware.
Outstanding shares (also called issued shares) are the shares actually issued to stockholders. Outstanding shares can never exceed authorized shares. Shares that are authorized but not yet issued belong to no one and don’t vote or receive anything. (They aren’t “treasury stock.” Treasury stock is stock the company issued and later bought back.) See Authorized, Outstanding and Fully Diluted Shares and Certificate of Incorporation.
Why 10 million shares?
The number itself is mostly convention, but it works well. With 10,000,000 shares, grants come out in whole, readable numbers, and per-share prices stay low, which employees tend to find motivating. With far fewer shares, small grants turn into fractions. Some companies authorize more, and that’s fine too. What matters is having enough room for founders, the pool and a reserve.
Par value goes with the share count. At 10,000,000 shares, Westaway sets par at $0.00001 per share, so founders can buy their shares for a nominal amount. See How to Determine the Par Value for Your Startup’s Stock.
How many shares should go to founders, the pool and the reserve?
Work backward from the 10,000,000 authorized shares. First, set aside the option pool for employees, advisors and consultants. Adopting an equity incentive plan with a pool of about 1,000,000 shares at incorporation is typical, and you can increase it later as your hiring plan grows. Second, keep a reserve of unissued shares, often around 1,000,000, so you can bring on another co-founder or a key early executive without amending the charter. Third, issue the rest to the founders, who buy them at par value under restricted stock purchase agreements with vesting.
| One founder | Two founders | Three founders | |
| Option pool | 1,000,000 | 1,000,000 | 1,000,000 |
| Unissued reserve | 1,000,000 | 1,000,000 | 1,200,000 |
| Founder shares | 8,000,000 | 4,000,000 each | 2,600,000 each |
| Total authorized | 10,000,000 | 10,000,000 | 10,000,000 |
The founders split their shares however they agree. See Founder Equity: How to Split Equity Among Co-founders and Employee Option Pool.
What happens if the reserve never gets issued?
Nothing. Unissued shares don’t count in anyone’s ownership percentage. In the two-founder example, if the company grants all 1,000,000 pool shares and never touches the reserve, there are 9,000,000 shares outstanding, and each founder owns 4,000,000 of 9,000,000, or about 44%. The reserve simply gives you flexibility. Running out of authorized shares is the costlier mistake, because you’d have to amend the charter with board and stockholder approval and a Delaware filing.
Do I need extra shares for SAFEs?
No. SAFEs and convertible notes don’t convert until a priced round. At that point the company amends and restates its charter to create preferred stock, and it increases the authorized common stock at the same time. You don’t need to set aside shares for SAFEs at incorporation. See SAFE.
Should I issue preferred stock at formation?
No. Issue only common stock to founders. Preferred stock is created at the first priced round, on terms negotiated with investors. Venture-track companies also shouldn’t create special founder classes, such as dual-class voting stock. See Preferred Stock vs Common Stock.
How do authorized shares affect the Delaware franchise tax?
Delaware calculates the franchise tax in two ways, and the company can pay the lower amount. Under the authorized shares method, which the state uses for its default notice, 10,000,000 authorized shares produce a bill of about $85,000. Under the assumed par value capital method, which takes into account the company’s gross assets and issued shares, an early-stage startup usually owes the $400 minimum. If you get a frightening notice, refile using the assumed par value capital method. See Delaware Franchise Tax.
As the company issues more shares, ownership percentages change. See Equity Dilution. If you’d like help setting up your company’s shares, see our startup incorporation service or contact us.
