Authorized shares are the maximum number of shares a company is allowed to issue as specified in its formation documents. These are different from outstanding shares, which is the amount of shares issued that are held by the public.
You might also hear it called authorized stock or authorized capital stock if you’re fancy.
Basically when a company is first starting out, they have to decide how many authorized shares they are going to offer. These contain all the shares available to be traded publicly on open markets. In contrast, the shares given to employees are called restricted shares.
The number of authorized shares available is usually more than what the company actually gives out. This means the company can offer and sell more shares in the future if they need to, basically keeping some shares on the side. Companies also want to hold on to some extra stock to maintain control of the company and prevent a hostile takeover.
The amount of authorized shares available can be increased when a company amends its charter, but it often requires that the shareholders approve it.
According to basically everyone, the magic number of authorized shares that a startup should issue is 10 million. That’s sort of what everyone does. For one, it’s a nice, round number that’s easy to divide. It’s also a bit of a mind game, because you can give an employee 10,000 shares and it sounds like a ton but in reality, it’s .01% of your company. Saying 10,000 is a lot nicer than saying .01%.
Yo man, can I get a sweet, sweet piece of those authorized shares when we go public?