How many shares should be authorized in the Certificate of Incorporation?

In the Certificate of Incorporation, there should be enough shares not only for the present founders, but also with consideration of bringing on additional partners, investors, granting equity compensation to the employees/ independent contractors. There is a difference between authorized shares and issued shares. Authorized shares are shares the company can potentially issue at any given time. Issued shares are the ones that have already been granted to someone, which are spoken for. Here is a danger various online company registration services present. The goals of the founders and possible business scenarios should be discussed with an experienced business attorney before any documents are filed with the Department of State. A standard form is not suitable for most businesses, but this is exactly the one being filed by online service providers. Think how simple the transaction is when retaining the services of online providers – you pay with a credit card and receive a company’s registration. That’s all. No one inquires what your business plans are, no one explains to you various options, offers additional protections and benefits of including certain terms, etc. also they do not carry any responsibility in case of unfavorable consequences as licensed professionals do. Then the logical question is what kind of quality can be expected? In the best case, business owners will have to pay to the attorney to revise the documents, which have already been filed (e.g. when investors review the company’s documents, they want to see certain provisions being included). In the worst case, owners will loose their interest in the company (e.g. in case their interest is diluted by issuing additional shares which was voted upon by a simple majority) or incur personal damages and realize the company cannot compensate them, and many other unfortunate events, which could be predicted and protected against by properly composed and registered documents.

 

Having said the above, I usually advise companies to authorize 10 million shares, with 8 millions being issued to the founders, and 2 million being left in the option pool for future grants in any. When company is small, there are just a few founders, it des not matter how many shares each has, but the percentage of his interest in the company. For example, 8 million shares can be divided two to give 50% interest to each the same as 1 million shares can be divided in two with the same outcome in terms of interest in the company. However, once the business grows, the market value of the company increases so is the value of each share. Should the company/founders want to do additional grants, the price of each share in 8,000,000 is undoubtedly less than if the value of the whole company is represented by 1,000,000 shares. Having more shares initially authorized at the time of company formation allows avoiding stock splits later on and all legal procedures and expenses associated with the process.

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