How Many Shares Should a Startup Authorize?

Why the Authorized Number Matters Before You Even Issue Stock

The number of shares your startup authorizes at incorporation sets a ceiling on everything that happens with equity later: founder splits, an employee option pool, and future investor rounds all draw from that same authorized total. Set it too low and you'll need a formal amendment, often requiring shareholder approval, before you can grant equity to your next hire. Most startup attorneys and formation templates solve this by authorizing a number well above what the company plans to issue immediately.

A Common Default: 10,000,000 Shares

A frequently used starting point for an early-stage Delaware startup is 10,000,000 authorized shares, typically with a small or no par value. Founders might split 8,000,000 of those shares at formation, leaving 2,000,000 (20%) unissued and reserved for an option pool that will be granted to employees as the company hires. This isn't a legal requirement, just a common convention, and the right number for your company depends on your specific founder split, hiring plans, and expected fundraising timeline.

How Authorized Shares Affect Delaware Franchise Tax

If you incorporate in Delaware, the number of authorized shares feeds directly into one of two methods the state uses to calculate your annual franchise tax. Under the Authorized Shares Method, tax starts at a minimum for 5,000 shares or fewer and rises with the authorized count, up to a $200,000 maximum, according to the Delaware Division of Corporations. A startup that authorizes 10,000,000 shares and gets taxed under this method alone could see a bill far higher than its actual size would suggest.

The Assumed Par Value Capital Method Usually Solves This

Delaware also lets a corporation calculate its franchise tax under the Assumed Par Value Capital Method, which factors in issued shares (not authorized shares) and the corporation's total gross assets, then computes a tax of $400 per million dollars of assumed capital, with the same $200,000 maximum. For an early-stage startup with modest assets and a large authorized-but-unissued share reserve, this method very often produces a dramatically lower bill than the Authorized Shares Method would on the same company. Delaware requires a corporation to use whichever method results in the lower tax, and both are automatically calculated when you file your annual franchise tax report, so a large authorized share count doesn't have to translate into a large tax bill as long as the filing is done correctly. See our guide on authorized shares vs. issued shares for how the two numbers relate.

Leaving Room for an Option Pool

Beyond tax considerations, a common reason to authorize more shares than you plan to issue immediately is to set aside an option pool, a reserve of unissued shares earmarked for future employee equity grants. A typical early option pool runs somewhere around 10% to 20% of the fully diluted share count, though the right size depends heavily on your hiring plan and what investors in a coming round expect to see reserved. Authorizing the pool upfront means granting options to a new hire doesn't require a fresh share authorization each time.

Leaving Room for Future Fundraising

An investor round typically involves issuing new shares (or a new class of preferred stock) to the incoming investors, which also draws from your authorized pool, or requires authorizing more shares, and often a new stock class, as part of the financing itself. Founders who authorize a reasonably large common stock pool at formation, with an understanding that a future round will likely require authorizing a separate preferred class, generally have an easier path than those who authorize just enough for the founders alone.

Increasing Authorized Shares Later

If you do need to authorize more shares after formation, whether because you under-authorized initially or your plans changed, this requires amending your articles (or certificate) of incorporation, typically with a board resolution, a shareholder vote, and a filing fee paid to your state's corporate filing office. This isn't an unusual step for a growing company to take, but it's extra paperwork and cost that authorizing a larger number upfront avoids.

Par Value Interacts With the Franchise Tax Calculation

The par value you assign to your authorized shares, often a very small fraction of a cent, or no par value at all, feeds into both Delaware franchise tax methods differently, and it can also affect how founder stock purchases are recorded. Get input from a startup-experienced accountant or attorney on par value before you file your articles, rather than copying a template without understanding why it chose the number it did.

Don't Confuse State of Incorporation With Franchise Tax Exposure Elsewhere

The franchise tax calculation described here is specific to Delaware. If you incorporate in a different state, check that state's own franchise or formation fee structure, since not every state ties its fees or taxes to authorized share count the way Delaware does.

Revisit Your Option Pool Size Before Each Financing Round

Investors in a priced round often expect the option pool to be "topped up" before their investment, which dilutes existing shareholders rather than the incoming investor. Understanding how pool sizing works before you negotiate a term sheet helps you see the real dilution a proposed round involves.

This Is Not Legal or Tax Advice

How many shares to authorize, what par value to use, and how to size an option pool all depend on your specific capitalization plans and fundraising timeline. Talk to a startup attorney and accountant before finalizing your articles of incorporation.