Authorized shares are the upper limit on shares a company may legally issue, set in the certificate of incorporation. Only a subset is typically issued to founders, investors, and the option pool.

How it works

At formation, a Delaware startup might authorize 10 million common shares. Founders receive 8 million issued shares; 2 million remain unissued but available. Before Series A, the board proposes increasing authorized common to 30 million and authorizing 5 million preferred shares for the new class. Stockholders approve; the company files an amended charter.

Issued plus reserved (option pool) must stay at or below authorized counts for each class. Lawyers model post-closing cap tables including pool refresh to ensure headroom. Some states charge franchise taxes tied to authorized shares, influencing how high founders set initial authorization. Delaware’s annual franchise tax calculation can spike if authorized share counts are set carelessly high at incorporation — counsel often recommends modest initial authorization with increases before financings.

Why it matters

• Founders: Treat charter amendments as part of financing logistics, not an afterthought. Delays at the secretary of state push wire dates.
• Operators: Equity administrators cannot grant options if the pool exceeds available authorized common — audit cap table math before board approval of grants. Oversized authorized counts at formation can inflate Delaware franchise taxes until counsel amends the charter.

Common mistake

Believing unissued authorized shares dilute current holders. Dilution happens only when those shares are issued to someone new — authorization alone is neutral.

Related ideas

/glossary/authorized-capital, option pool, issued and outstanding, and /glossary/as-converted share count.