Know the difference between authorized shares and issued shares first.
Authorized stock is the legal limit on the number of shares an organization is allowed to issue, as provided for in the formation documents.
Issued shares are the actual number of shares that have been transferred to founders, employees and investors.
When you issue shares, you want to be careful to avoid distributing a number that’s too close to your authorized number. This is because you’ll want to ensure maximum flexibility to accommodate your company’s growth, reserving an adequate supply for future investors and employees.
What exactly is an adequate number of shares is usually indeterminable for a startup; however, to avoid future legal costs and possible tax consequences associated with the need to increase authorized shares, it’s best to start out with more than you think you’ll need. Any number is arbitrary, but 10,000,000 shares has proven to be a reliable figure for many startups.
Make sure that your formation documents empower your company to increase the number of authorized shares in case you need more wiggle room in the future. You’ll also want to be sure that if you incorporate in a state that taxes your shares, that their initial value is minimal so that you can avoid unintended tax consequences.
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