There is no simple, “one size fits all” answer to how many shares you should authorize when you form a corporation. Instead, you will need to discuss your goals with a Silicon Valley corporate lawyer who can help you think through all of the relevant considerations.
What are Articles of Incorporation?
A corporation’s founders file Articles of Incorporation with California’s Secretary of State to establish the business as a new corporate entity in the state. Your articles will contain important information about the corporation, such as:
- The name
- The principal address
- The company’s purpose
- The registered agent, in case someone needs to serve documents on the corporation
New business owners can use fill-in-the-blank Articles of Incorporation and file them through the mail, in person, or electronically. Most of the information in the Articles is straightforward, so the forms should are not overly burdensome or time-consuming to complete
However, the Articles of Incorporation will also request information about how many shares you are authorizing. A share represents a percentage of ownership in a company. If a corporation has 100 shares, then someone who owns 50 of them owns half of the corporation. When a corporation has millions of shares, someone who owns a handful owns only a tiny piece of the company.
How Many Shares Should You Authorize?
California law requires that a corporation authorize at least one share, but you can authorize more. The number you should authorize is a topic you should consider with your Silicon Valley corporate attorney. Generally, there are a few considerations we go over with clients:
- You can sell shares as a way of raising capital for the business, which helps you grow. For this reason, you need enough shares to attract sufficient investors. However, you should be mindful of selling away too many shares because you are giving away more control of your company to new investors.
- Each share represents only a fraction of the corporation’s value. If a corporation is worth $250,000, then 250 shares will each be worth $1,000. However, if you authorize 1 million shares, then they each are worth only 40 cents. You want shares to have sufficient worth that they attract buyers.
- Issuing a large number of shares can signal that you have confidence in your business and its potential to grow, which might draw investors.
- You might pay your employees with stock. Some employees might be pleased to be given 1,000 shares of stock instead of 10, even if they are worth the same amount.
Helpfully, a corporation does not need to issue all the shares that it authorizes. Instead, the corporation can retain some to issue later, when business conditions warrant it. This fact can take some of the pressure off when deciding how many shares to authorize when filing your Articles of Incorporation.
Discuss Share Authorization with a Silicon Valley Corporate Lawyer Today
Positioning your startup for growth in a crowded marketplace requires careful planning and sound legal advice. At Startup Company Counsel, our attorneys have years of experience advising entrepreneurs about business formation issues, including share authorization and issuance. If you have a question, we are available and ready to hear from you.
To schedule an appointment with one of our attorneys, please call 408-441-7555 or submit an email using our online contact form.