How many shares should I issue when incorporating?

I suggest in the order of 10,000,000 for two reasons:

1. When issuing equity to employees, there's a psychological bonus for the employee to receive options to purchase 100,000 shares as opposed to 10,000.
2. If there's ever the possibility of an IPO then the market cap of the company should be in the order of $100m's so 10m shares implies a price in the order of $10's which is reasonable. If you'd started with fewer, you'd probably feel the need for a stock split.

When you start out, you would issue founders shares and that's totally up to you. The board can always issue more shares when going after more money.

The standard for a startup that will seek venture is 3,000,000 shares but you can pretty much do whatever you want, within reason.

Jarie

There actually are two different questions: How many shares should be authorized? How many should be issued?

These questions are discussed in the post "How Many Shares Should My Corporation Authorize and Issue?"

I usually set up my clients' corporations to authorize ten million shares for the following reasons:

• To allow plenty of flexibility in allocating shares among founders and other shareholders.
• To make employees or contractors who receive shares or options feel like they have received something of greater value. I realize this is a bit silly, but an individual will be more impressed receiving 10,000 shares rather than 100 shares, even if, in both instances, the number of shares represents the same percentage of ownership.

(For a Delaware corporation, you need to make sure the par value is low to avoid excessive annual fees to the state.)

As to how many of the authorized shares are issued (also discussed in the post), that is much more variable.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

The answer to this question depends on factors such as where you are incorporating and on whether you plan on hiring several employees or plan on going through rounds of investment. First, keep in mind the difference between authorizing and issuing shares. Authorizing shares refers to the total amount of shares you want to make available. The number of issued shares represents what is actually distributed to parties. In other words, you can authorize 1 million shares, and initially issue 600,000 to yourself as owner. As time goes by, you may take from the remaining 400,000 to allot to other investors or employees. The main benefit of authorizing several million shares will allow flexibility such that you avoid fractional shares or having to authorize more shares down the road.

On the other hand, the major consideration in having such a large number of shares in the United States and other countries are the filing or franchise tax fees associated with the number of shares authorized and the par value of the shares. The other consideration is that authorizing and issuing millions of shares may result in high consideration amounts (what somebody has to pay for the shares) -- which may be a significant cost for smaller companies.

In jurisdictions like Hong Kong, 10,000 shares is a standard number chosen, with a par value of 1 HKD per share. The filing fee due at incorporation is .1% of the share value, or 10 HKD. (Share value is calculated by multiplying the number of authorized shares by the par value.)

Considerations within the US vary significantly according to the state. For example, in Nevada, when you incorporate, if your total share value is $75,000 or less, your filing fee is $75. If however, you offer 6,000,000 shares with each share valued at .1, your total capital value is $600,000 and your filing fee jumps to $375. The maximum filing fee may go as high as $35,000 USD in NV! Beware that in some states such as Nevada, if your par value is too low, the state will revalue what you’ve chosen. For example, if your par value is less than .001, the office will nevertheless assume a stated par value of .001 for each share.

Michigan’s filing fee simply depends on the number of authorized shares without any consideration given to par value. For example, if you authorize less than 60,000 shares, your fee is $50 USD. If you authorize 9,000,000 shares, you’re looking at $500 USD.

If you incorporate in Delaware, you should think about your franchise tax fees due annually. Delaware uses two methods of calculating your franchise tax. If your main concern will be minimizing costs, I suggest authorizing 5,000 shares resulting in a $75 tax assessment. If you need more flexibility by authorizing more shares, you might use the Assumed Par Value method which results in a franchise tax fee of at least $350.

Of course, consider the particulars of your situation first for all the above reasons. But if you’re a very small company looking to minimize costs, generally speaking, authorizing 10,000 shares with a par value of $.0001 may make sense for you. If you grow larger, you can then authorize more shares down the road.

See the following link for more information about Delaware:

http://corp.delaware.gov/frtaxcalc.shtml

Note – this is not legal advice, and no attorney-client privilege is established.

I want to incorporate a new company and authorize 10MM shares. I also need $50,000 to get started. I am considering inviting friends and relatives to invest, and issue them shares. I want to own 50% of the company and I also want to reserve 4MM shares in the company to sell later - because I will need to raise an additional $1MM to expand the business globally later.

Will it be fair to allocate the remaining 1MM shares among the people who invest the $50k now? What should I do instead.

Thanks.