Authorized shares are the maximum number a company can legally issue (set in the charter). Issued shares are what has actually been given to shareholders. A company might authorize 10 million shares but only issue 6 million. Increasing authorized shares requires a board vote.
authorized shares / issued shares
/ˈɔːθəraɪzd ʃeərz / ˈɪʃuːd ʃeərz/ noun — Authorized shares: the total number of shares a corporation is legally empowered to create, as specified in its certificate of incorporation. Issued shares: the subset of authorized shares that have been formally distributed to shareholders. The difference between the two — authorized but unissued shares — constitutes a reserve available for future grants, investor rounds, and option pools without requiring a charter amendment.
Why it matters
Understanding the difference between authorized and issued shares prevents confusion when reading a cap table or incorporation documents. A company with 10 million authorized shares and 6 million issued shares has 4 million shares available for future grants, option pools, or fundraising without needing to amend the charter.
If the company runs out of authorized but unissued shares, it must go through a formal process to authorize more, which takes time, legal fees, and requires shareholder approval. Planning ahead by authorizing enough shares at incorporation saves legal costs and delays later — especially when you need to move quickly during a funding round.
Investors and lawyers reviewing your cap table will look at your authorized share count relative to your issued shares and option pool. A company that has nearly exhausted its authorization signals poor planning and creates friction at closing because a charter amendment must be completed as part of the deal.
How it works
When a company incorporates, the certificate of incorporation specifies the number of authorized shares, typically 10 million for an early-stage startup. The founders then issue a portion of those shares to themselves. If two co-founders split the company 60/40, they might issue 6 million and 4 million shares respectively.
More commonly, startups authorize more shares than they initially issue, leaving room for an option pool and future investors. For example, a company might authorize 10 million shares, issue 7 million to founders, and reserve 1.5 million for an option pool, leaving 1.5 million unissued and unreserved for future needs.
Before a funding round, the company often increases its authorized shares to accommodate new investors and expand the option pool. This requires a board resolution and, depending on the governing documents, shareholder approval. The filing is made with the state (usually Delaware) by amending the certificate of incorporation.
Issued shares are further divided into outstanding shares (held by current shareholders) and treasury shares (shares the company has repurchased). Most early-stage startups have no treasury shares. Outstanding shares are what matters for ownership calculations; fully diluted shares (which include options and convertible instruments) are what investors use to calculate their stake.
| Term | Definition | Used for |
|---|---|---|
| Authorized shares | Maximum the company can ever issue (set in charter) | Legal ceiling; does not affect ownership |
| Issued shares | Shares that have been formally distributed | Starting point for ownership calculation |
| Outstanding shares | Issued shares currently held by shareholders | Current ownership percentages |
| Treasury shares | Issued shares repurchased by the company | Excluded from outstanding; rarely used in early-stage |
| Fully diluted shares | Outstanding + options + warrants + convertibles | Investor ownership calculations |
History and origin
The concept of authorized versus issued shares traces to early corporate law in England and the United States, where regulators wanted visibility into the maximum potential capitalization of a corporation. By requiring companies to declare a maximum share count in their charter — a public document — creditors and investors could assess the upper bound of potential dilution.
Delaware's General Corporation Law, which became the dominant framework for US startup incorporation in the 20th century, codified the authorized/issued distinction in a way that gave corporations significant flexibility. Companies could authorize far more shares than they intended to issue, creating the strategic buffer that modern startups rely on. Delaware also made charter amendments relatively straightforward compared to other states, reinforcing its dominance as the preferred incorporation state.
The standard of authorizing 10 million shares at incorporation became a Silicon Valley convention in the 1990s and early 2000s. It was large enough to accommodate multiple rounds of financing and a meaningful option pool, while remaining below thresholds that triggered additional Delaware franchise tax calculations. Y Combinator and major startup law firms like Cooley and Wilson Sonsini codified this standard in their incorporation templates, and it has remained the default ever since.
Frequently asked questions
What is the difference between authorized and issued shares?
Authorized shares are the maximum number of shares a company is legally permitted to issue, as defined in its certificate of incorporation. Issued shares are the shares that have actually been distributed to shareholders. A company might authorize 10 million shares but only issue 7 million — leaving 3 million unissued and available for future grants, option pools, or investors.
How many shares should a startup authorize at incorporation?
Most early-stage startups authorize 10 million shares at incorporation. This is widely accepted because it provides enough shares to accommodate founder grants, an option pool, and early investors without immediately needing to amend the charter. Some attorneys recommend 15-20 million to build in more headroom for later rounds.
What does it cost to increase authorized shares?
Increasing authorized shares requires amending the certificate of incorporation, which involves a board resolution, often a shareholder vote, and a filing with the state of incorporation. Legal fees typically range from $1,000 to $3,000, plus the state filing fee. This is why authorizing adequate shares upfront saves money and friction later.
What are outstanding shares?
Outstanding shares are issued shares currently held by shareholders — including founders, investors, and employees. They exclude treasury shares (shares the company has repurchased). Outstanding shares are what you use to calculate ownership percentages on the cap table.
What is the difference between outstanding shares and fully diluted shares?
Outstanding shares are the shares currently held by shareholders. Fully diluted shares include all outstanding shares plus all shares that would exist if all options, warrants, convertible notes, and SAFEs were exercised or converted. Investors always calculate ownership on a fully diluted basis.
Why do startups leave some authorized shares unissued?
Leaving a buffer of authorized but unissued shares gives the company flexibility to grant options to new employees, issue shares to investors, and handle corporate events without immediately needing to amend the charter. Most startups maintain an option pool of 10-20% of outstanding shares reserved for future employee grants.
Do authorized shares affect ownership percentages?
No — authorized shares that have not been issued do not appear in ownership calculations. Ownership is calculated based on outstanding shares (or fully diluted shares). Only when additional shares are actually issued do they dilute existing shareholders. Authorizing more shares does not itself change anyone's ownership percentage.
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