You want to ensure maximum flexibility to accommodate your company’s growth. Since authorized stock is the legal limit on the number of shares an organization is allowed to issue, remaining nimble enough to include future investors means authorizing enough at incorporation. What exactly is “enough” is an unknown for any 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.
Just make sure that if you’re incorporated in a state that taxes your shares, you initially value them at a minimum so you don’t get hit with any unintended tax consequences. Also, you’ll want to make sure your formation documents allow you to increase authorized stock should that need ever arise.
Preferred stock benefits institutional investors more than individual ones. For example, there are some distinct tax advantages available to institutions that are unavailable to the individual investor. Preferred issues tend to be used as vehicles to raise significant capital. If you think your company might have this need, you should really consult an attorney who can advise you about how much preferred stock you actually need. This should be ascertained with special expertise, but I wouldn’t recommend more than 10%. Again, no two companies are alike and each has its special circumstances. Seeking a legal assessment is highly recommended.
In contrast to preferred stock, common stockholders have voting rights. The overwhelming majority of your authorized stock – 90-99% – should consist of common issues.They elect the BOD and vote on certain aspects of corporate policy. This class is the last group to be paid – after creditors and preferred stockholders – in the event of a bankruptcy. On the other hand, common stock typically appreciates faster than preferred.
A good rule of thumb is to issue between one-third and one-quarter of your authorized stock to founders. How you allocate that pool among the founders is a separate question. Generally, there are fixed equity splits where the percentage is not subject to change; and then there’s a dynamic-split model that is increasingly being used as an alternative to the fixed equity model.
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