Since you are talking about future funding rounds and VCs, the number of shares youauthorize and then issue to co-founders is an important decision.
Authorized stock is the legal limit on the number of shares an organization is allowed to issue, as provided for in the formation documents.
Issued shares is the actual number of shares that have been transferred to founders, employees and investors.
When you issue shares, you want to be careful to avoid distributing a number that’s too close to your authorized number. That’s because you’ll need to ensure that your company is nimble enough to include future investors and employees. This is true even though VCs will typically insist on preferred stock.
Make sure to reserve an adequate supply for your option pool. Allocating approximately 10-15% of your authorized shares for stock options is the norm.
Startups can feel anxious or shy about issuing millions of authorized shares, but it is crucial that a company optimizes its flexibility to accommodate for future growth. Reserving an ample supply for future investors and employees requires long-range planning, which starts now.
Here are a few more things to keep in mind:
- While determining what is an ‘adequate’ number of shares is usually impossible for a startup, it’s best to start out with more than you think you’ll need since there can be legal costs and potential tax consequences associated with the need to increase authorized shares. 10,000,000 shares might sound ridiculously high, but has proven to be a reliable figure for many startups.
- Make sure that your formation documents empower your company to increase the number of authorized shares in case you need more wriggle room in the future.
- To avoid unintended tax consequences, be sure that your initial share value is minimal in case the state in which you incorporate taxes shares.