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How Many Shares Should I Use To Incorporate My Company?

Question: How many shares should I use to incorporate my company?

Keep it simple.  The more shares you authorize, the more you’ll have to pay in taxes (although these are not large numbers).  They key is having enough shares to have the ability to grant all sorts of equity to different people who help your company.  For instance, if you only authorized 10 shares, the minimum amount of the company that you could grant would be 10%.  So you want a large enough number to be able to grant small portions to folks.  Whatever number you choose, don’t worry.  These are all easily changeable with stock splits later down the road.

October 3rd, 2011 by     Categories: Company Creation    
  • http://twitter.com/DreMoran Andres Moran

    Yep, I learned this one the hard way.  I registered a company for 5 million shares and almost fell out of my chair when Delaware sent us an estimated tax bill for $50,000 while the company was still pre-revenue.  Almost laughable…. almost.

    • Dave

      Except if you then filed on the alternate fee based methodology, which uses par value and assets as most companies do, you probably paid the minimum $350

      • Anonymous

        Yep, most states have this, as well.  This is one of those times when a quick call with a lawyer can save you a LOT of money

    • Anonymous

      Yes, this is something to pay attention to depending on what state you incorporate.  It’s always easy to start small and do a stock split

    • Don

      What did you do after getting this tax bill and laughing:)?

  • http://mschade.me/ Michael Schade

    From a link in an earlier Ask the VC post, 10,000,000 shares was the recommended amount.

    Would you say that this is still a pretty reasonable number for startups?

    • Anonymous

      Really nothing magical.  If you aren’t going to be issuing any stock to anyone other than “big hires” you could do 2,000,000 shares, too.  Either way, you are in the right zone

      • http://mschade.me/ Michael Schade

        Great, thank you for following up on this!

    • Anonymous

      Also make sure that you understand how much tax per share your state of incorporation mandates.  And this numbers can change, too.

  • Sean Crockett

    Standard practice for a Silicon Valley tech startup is to incorporate as a Delaware C Corp and authorize 10 million shares of common stock with a par value of 0.001 or 0.0001 dollars per share.  

    The founders then take ~8 to 8.5 million shares between them (i.e., 80 – 85% of the common stock) and reserve an option pool of 1.5 to 2 million shares (i.e., 15 – 20% of the common stock) to grant as options (or restricted stock or RSUs) to early employees, consultants, board members and advisers. The founders’ stock should be restricted stock that vests over time to ensure that a founder who leaves the company in the first few months can’t walk away with a large chunk of the company.  Standard practice is to have the restricted stock vest over 4 years with a one year cliff.  This means that after 1 year,  25% of the stock will vest, and the remaining 75% will vest in monthly increments (1/48th of the total amount) for the next 3 years.  

    When you incorporate and issue shares of restricted stock to founders, don’t forget to file your 83b elections in a timely manner!  Here’s a link to more information on 83b elections and why they’re important: http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83b-election/

  • Anonymous

    “The more shares you authorize, the more you’ll have to pay in taxes”.  Didn’t know that. Always assumed that taxes (in general) were always based in some way on the flow of money from one set of hands to another (income, revenue, earnings, capital gains, etc.). Will have to look into this. Thanx :)

    • Sean Crockett

      That’s only partially true.  Standard practice for a tech startup is to pay their Delaware Franchise Tax using the “Assumed Par Value Capital Method” (http://corp.delaware.gov/frtaxcalc.shtml), which almost always equates to the minimum tax of $350 (as Dave mentioned below)

      • Anonymous

        Thanks. Good to know :)

  • http://twitter.com/DougBend Start-Up Attorney

    I recently wrote a blog post about this topic.  There are two schools of thought:

    1. If you want to pay the minimum amount of Delaware franchise tax each year ($75), you may decide to authorize the company to only issue 5,000 shares.

    2.  The second school of thought is to authorize millions of shares, typically 10,000,000 shares.
    The rationale is individuals who receive 1,000,000 shares feel like they are receiving something of greater value and may be more motivated than individuals who receive 500 shares, even if the shares represent the same percentage of ownership in the company.  In addition, having more shares provides more flexibility in allocating shares on vesting schedules.

    If you want to read the entire post, you can view it here:  http://wp.me/p1ivVG-bG

    Thank you,
    Doug