A recent LawTrades user asked: If you’re Incorporating as a Delaware C-Corp, is there any reason why you should authorize more than 5,000 shares initially?
The simple answer is yes. If you’re hoping to eventually raise angel or VC financing, then as others have pointed out you shouldn’t limit yourself. Authorizing 10,000,000 is the norm for startups.
However, if you go the Delaware C-corp route, you need to ensure that the company is not formed with a no par value, or your franchise taxes will be enormous. Assuming you incorporate as a Delaware C-corp, your franchise taxes will be calculated in one of two ways: either by using the authorized shares method, or by using the assumed par value capital method.
If your company is formed with no par value, you’ll be forced to use the authorized shares method, which at 10,000,000 shares would result in an unreasonably high franchise tax for a bootstrapped startup.
By specifying the lowest possible par value, you’ll be able to use the assumed par value capital method, which is the one you want to use as a cash-limited startup authorizing 10,000,000 shares. You’ll pay around a couple hundred dollars more than would if you issued less than 5000 shares, but you’ll have much-needed flexibility to accommodate future growth.
Alternatively, you should consider incorporating in your company’s home state. This will probably save you more money and time, which you want as a bootstrapped startup. When you get to the point where you enter the angel or VC financing round, your investors either won’t object to the structure, or they will require that you re-incorporate in Delaware. This is not an uncommon situation, and re-forming in Delaware – if it even becomes necessary – will be more feasible in the later financing rounds. Moreover, it’s a relatively simple process.
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