Authorized vs. issued shares in a Delaware C-Corp

If you've incorporated a Delaware C-Corp, your certificate of incorporation states a number of authorized shares, and your founder stock purchase agreements state a different, smaller number of issued shares. The gap between the two affects who owns the company, whether new grants are valid, and how much Delaware franchise tax you owe.

Authorized shares are the maximum number of shares the corporation can legally issue, as set in its certificate of incorporation. Issued shares are the portion of those shares the company has actually issued to stockholders. Authorized shares set the ceiling, and issued shares determine ownership.

Below is how each term works under the Delaware General Corporation Law (DGCL), how founder shares are allocated and issued, and what happens when a company needs more shares than it authorized.

Six share terms cover almost every cap table question

Authorized shares are a ceiling, not ownership. DGCL Section 102(a)(4) requires every Delaware certificate of incorporation to state the number of shares of each class the corporation can issue and their par value. Nobody owns authorized shares, and the number has no bearing on what the company is worth. Only the certificate of incorporation sets it. Bylaws, board resolutions, and cap table software cannot change it.

Issued shares are the ones someone holds. A share becomes issued when the company formally issues it to a stockholder, such as a founder buying restricted stock at formation, an employee exercising an option, or an investor in a priced round. Under Section 161, the board can issue shares without stockholder approval as long as they are already authorized. Section 152 requires the board to approve the issuance and determine the consideration the company receives.

Outstanding shares exclude stock the company has bought back. If the company repurchases shares and holds them as treasury stock, those shares remain issued but are no longer outstanding. Treasury shares do not vote and are not counted in ownership percentages. At most early-stage companies, issued and outstanding are the same number until a departing founder's unvested shares are repurchased.

Par value is set low for two reasons

Par value is the minimum price at which a share can be issued. Section 153 prohibits issuing par value shares for less than their par value. Early-stage companies usually set it at $0.00001 or $0.0001 per share.

Founder purchases stay nominal. At $0.00001 par, 4,000,000 shares cost $40. A founder can buy millions of shares for a documented, affordable price.

Franchise tax stays near the minimum. Under the Assumed Par Value Capital Method, a low stated par value generally keeps Delaware franchise tax close to the $400 minimum. The calculation is covered in the franchise tax section below.

10,000,000 authorized shares is a convention, not a requirement

Most venture-backed Delaware companies authorize 10,000,000 shares of common stock at incorporation, issue about 8,000,000 to founders, and reserve 1,000,000 to 2,000,000 for an equity incentive plan.

Mathematically, the total matters less than the split. A company that authorizes and issues 1,000,000 shares divides ownership the same way as one that uses 100,000,000. The 10,000,000 convention exists for practical reasons.

Grants stay in whole numbers. An early employee can receive 10,000 shares, or 0.1% of the company, without fractional shares.

Investors recognize the structure. A familiar share count makes diligence and financing documents easier to review.

The headroom is useful without being excessive. Enough shares stay unissued to cover early hires and changes, but not so many that the franchise tax calculation becomes a problem.

Here is how that plays out. Northwind Labs, Inc. incorporates in Delaware with 10,000,000 authorized shares of common stock at $0.00001 par. It has two founders, Maya and Daniel.

Maya pays $40.50 for her shares and Daniel pays $39.50. Based on the 8,000,000 issued shares, Maya owns 50.6% and Daniel owns 49.4%. On a fully diluted basis of 9,200,000 shares, which investors will use once the equity plan exists, Maya holds about 44.0%, Daniel about 42.9%, and the pool about 13.0%. The 800,000 unissued, unreserved shares do not appear in either calculation.

The split is deliberately uneven. When two founders hold equal stakes and both sit on the board, a disagreement can leave the company unable to act. A slightly larger stake for one founder, or keeping one founder off the initial board, avoids that deadlock.

Founder shares are only valid when every step is documented

An issuance is not complete because a document was signed. A valid founder issuance has six parts, completed in this order.

Board approval. The board adopts a resolution, usually by written consent, approving the issuance, the number of shares, the purchase price, and any vesting terms. This satisfies Section 152.

Restricted stock purchase agreement. Each founder signs an agreement setting out the shares, price, vesting schedule, and the company's right to repurchase unvested shares. Founders usually assign related intellectual property to the company in this agreement or a separate one.

Payment. The founder pays the purchase price, and the company keeps a record of the amount and date. The payment date should normally match the agreement date. If it doesn't, the company should note the difference in its records, especially where the founder is filing an 83(b) election.

Spousal consent, where relevant. In community property states such as California and Texas, a founder's spouse may have a property interest in the shares. A spousal consent keeps the repurchase right and transfer restrictions enforceable.

Stock records. The company records the issuance in its stock ledger. Delaware allows certificated or uncertificated shares. Under Section 158, the board can authorize uncertificated shares, in which case the company sends the stockholder the notice required by Section 151(f).

83(b) election. For shares subject to vesting, each founder should consider filing an 83(b) election within 30 days of the stock transfer, under Internal Revenue Code Section 83(b)(2). The deadline cannot be extended.

Vesting does not change whether shares are issued. Restricted founder shares are issued and outstanding from the purchase date. The founder owns them, votes them, and counts them in ownership calculations. Vesting only determines how many shares the company can buy back, usually at the original price, if the founder leaves. Under the common four-year schedule with a one-year cliff, 25% vests at the one-year mark and the rest vests monthly over the following three years. Repurchased shares become treasury shares or are retired.

More shares than authorized requires a charter amendment first

The board can issue up to the authorized limit on its own. Beyond it, the certificate of incorporation has to be amended before any new shares are issued.

Under DGCL Section 242, an amendment for a private company generally involves three steps. The board adopts a resolution approving the amendment, stockholders approve it (usually by written consent under Section 228), and the company files a certificate of amendment with the Delaware Secretary of State. The amendment takes effect on filing, and only then can the new shares be issued. Where the founders are the only stockholders, approval is usually straightforward. Later stockholders can be more cautious, since more authorized shares means more potential dilution.

Adding a co-founder is the most common trigger. The standard approach is to issue new shares rather than transfer shares between founders, which creates tax and accounting complications. If Northwind wants a third co-founder to hold 20% of issued shares after the issuance, it needs to issue 2,000,000 new shares, because 2,000,000 of 10,000,000 is 20%. Northwind has only 800,000 unissued, unreserved shares, and the 1,200,000 reserved for the equity plan cannot fund a founder grant without changing the plan. It must first amend its certificate to authorize at least 1,200,000 more shares, then issue the 2,000,000. Some solo founders issue themselves fewer shares at formation for this reason, leaving room for a co-founder they expect to recruit.

A priced round rewrites the structure. A Series Seed or Series A round usually involves an amended and restated certificate of incorporation. The new charter authorizes preferred stock for the investors, sets out its rights and preferences, and usually increases authorized common stock to cover conversion of the preferred, a larger option pool, and conversion of any SAFEs or convertible notes. Companies with clean records of authorized and issued shares move through this faster.

Franchise tax is where the distinction costs money

Delaware franchise tax is often where companies first see the difference between authorized and issued shares, because the state's default calculation uses authorized shares.

Authorized Shares Method (default). Companies with up to 5,000 authorized shares pay $175, companies with 5,001 to 10,000 pay $250, and each additional 10,000 shares or part of that adds $85. A company with 10,000,000 authorized shares owes about $85,165 under this method. The franchise tax notice Delaware sends is typically calculated this way.

Assumed Par Value Capital Method. This method uses the company's total issued shares and its total gross assets, as reported on Form 1120, Schedule L. The minimum tax is $400. The company has to calculate and file under this method itself.

For Northwind, with 10,000,000 authorized shares at $0.00001 par, 8,000,000 issued shares, and $250,000 in gross assets at year-end, the assumed par value is $250,000 divided by 8,000,000, or $0.03125 per share. Because the stated par of $0.00001 is lower, the assumed par value capital is $0.03125 multiplied by 10,000,000 authorized shares, or $312,500. That rounds up to $1,000,000, taxed at $400 per million, for a tax of $400 instead of about $85,165.

The calculation depends on an accurate issued share count. Authorizing far more shares than needed while issuing only a small portion can raise the tax even under this method, which is one reason companies issue a meaningful portion of their authorized shares at formation. Delaware franchise tax and the annual report are due March 1 each year.

How Inkle fits in

Inkle Incorporation assists with Delaware C-Corp incorporation.

The bottom line

Authorized shares are a legal limit, and issued shares are ownership. Most share problems at early-stage companies come from treating the cap table spreadsheet as the source of truth instead of the certificate of incorporation and board consents: equity promised beyond what the charter allows, issuances without a board resolution or payment record, and option pool shares used for something else. Each is cheap to prevent at the time of issuance and expensive to fix in diligence. The same discipline pays off every March, because an accurate issued share count is what lets the company file franchise tax under the method that costs $400 rather than tens of thousands.

Frequently asked questions

What is the difference between authorized and issued shares?

Authorized shares are the maximum a corporation can issue under its certificate of incorporation. Issued shares are those it has actually issued to stockholders. A company can never validly have more issued shares than authorized shares.

Do authorized but unissued shares dilute founders?

No. Unissued shares that are not reserved or promised to anyone do not affect ownership. Dilution happens only when shares are issued or reserved for options and convertible instruments.

How many shares should a Delaware startup authorize?

Most venture-backed startups authorize 10,000,000 shares of common stock, issue about 8,000,000 to founders, and reserve 1,000,000 to 2,000,000 for an equity incentive plan. The split matters more than the total.

Can the board issue shares without stockholder approval?

Yes, as long as the shares are already authorized in the certificate of incorporation. Under DGCL Section 161, the board can issue authorized shares on its own approval. Issuing beyond the authorized limit requires a charter amendment, which needs stockholder approval.

What happens if a company issues more shares than it has authorized?

The extra shares are defective, or putative, stock. They can be ratified under DGCL Section 204 through board and, where required, stockholder action and a filing with the state. The Court of Chancery can also validate them under Section 205.

Why is my Delaware franchise tax bill so high?

Delaware's notice uses the Authorized Shares Method, which produces large figures for companies with millions of authorized shares. Recalculating under the Assumed Par Value Capital Method, based on issued shares and gross assets, usually brings the tax to or near the $400 minimum for early-stage companies.