How Many Shares Should be Authorized in a Certificate of Incorporation?

Articles of Incorporation are an essential requirement of forming a California startup corporation. This document is filed with the California Secretary of State’s office and establishes the corporation as a legal entity as well as certain key facts about the corporation, including the name of the corporation, its principal place of business, the name and address of its registered agent, the purpose of the corporation, and others. One of the most important decisions that founders are faced with when filing an Articles of Incorporation is how many shares of stock to authorize. There are many considerations that should be addressed when making this decision, so it is important for anyone considering forming a corporation to discuss their circumstances and goals with an experienced Silicon Valley business law attorney.Articles-of-Incorporation-300x225

Determining how many shares to issue can be complicated

Authorizing shares allows a company to divide ownership among many different parties and also makes it possible to raise capital. As such, it is important to authorize enough shares to accommodate growth but not so many as to make individual shares nearly worthless. Importantly, not all the shares that the Articles of Incorporation authorizes have to be issued, so a company can reserve shares for issuance at a later date. Some of the reasons it may be beneficial to authorize more shares than you plan on issuing include the following:

  • Raising additional capital in the future
  • Shares may be issued upon the exercise of a stock option
  • Shares may be issued during a forward stock split
  • Reserved shares may be issued as compensation at a later date

One of the main benefits of issuing more shares is based on perception – companies with large IPOs are taken more seriously than smaller organizations. In addition, when you issue shares to employees as compensation, people simply feel better receiving 100,000 shares than they would if they received 10,000 shares, even if they represent the same ownership perception. Too many shares can result in stock dilution, however, which is generally to be avoided as well.

Contact a Silicon Valley business law firm today to schedule a consultation

Anyone who is considering forming a corporation and issuing stock should consult with an experienced Silicon Valley startup attorney prior to filing any paperwork with the state. The lawyers of Structure Law Group, LLP are seasoned San Jose business attorneys who can provide entrepreneurs and founders with valuable insight and advice regarding corporate formation and raising capital. To schedule an appointment with one of our lawyers, call our office today at 408-441-7500 or send us an email through our online contact form.