What Is the Standard Number of Shares to Create in a New Company?

Q: This may seem rather fundamental and elementary, but I cannot seem to receive a solid answer from anyone. When filing the articles of incorporation (charter) papers for a C-Corporation, is there a strategic amount of shares to issue at a certain price per share upon incorporating, or is this irrelevant in the beginning? I am the only equity founder at this point, but will soon be raising seed funding, as well as setting aside 15%-20% equity for employee stock options. I have heard that 1,000,000 shares at .01 per share is typical. Is this anywhere near correct?

A: (Jason) Pre-funding, it doesn’t really matter. Make sure that you have a large enough number of shares that you can give small enough awards away. In other words, if you only had 100 shares, the minimum amount that you could grant / give away is 1% of the company – probably not a great result.

Along those same lines, consider, too, what your first hires will think if they get an option grant of “10 shares.” I realize that whether I get 10 shares or 1,000,000 is irrelevant unless I know the denominator, but there are plenty of folks that I’ve seen get awfully irrational with a grant of a small amount of shares without ever asking about the total shares in the company.

Finally, consider what state of incorporation you are thinking about and what the taxes are associated with the number of shares of stock. Many states base early corporate taxation on the amount of shares authorized.

Your numbers of 1,000,000 and .01 par (which really doesn’t matter at all) seem fine, but consider the thoughts above.

  • Eddie Walker

    Good thoughts. A few additional coments. First, Delaware taxes you based on shares but also allows for an alternative method based on the value of your assets. Which in most startup companies is close to zero, so the tax will be near the minimum levels even if you set authorized shares at something like 100 million. This isn’t true in other states but many max out their franchise taxes (instead of having them scalable based on shares), so get a lawyer or a reputable corporate filing service (Corporation Service Company or Corporation Trust are two well-known ones) to tell you what the rules are in your chosen state. Second, be careful about par value — in most states, that is the minimum amount of money you have to invest in order to have legally purchased the shares. So if you want to issue yourself 1 million shares that have a par value of $0.01 per share, that means you actually have to write a check to your company for $10,000. In most states you can have par value be really low (like $.001 or $.0001 per share), and also in most states you can actually dispense with par value altogether (for instance, Virginia).
    Great blog!