Authorized but unissued shares a corporation’s board sets aside to be issued, usually upon the conversion of outstanding convertible securities (e.g., stock options). Also known as reserved shares.
A corporation can issue as many or as few authorized shares (as outlined in its charter or properly enacted amendments to its charter) as it pleases during an initial offering and any subsequent secondary offerings. It may also reserve shares for later issuance as it pleases too. Most of the time, shares may be specifically set aside and reserved for later issuance pursuant to the terms of a stock option plan. Under such circumstances, the reserved shares are only issued after the terms of the plan have been fulfilled. Warrants may also be issued to third parties – if the warrant is ultimately exercised, reserved shares will be issued pursuant to the terms of the warrant.
Company X has five existing upper-level managers. Under the terms of Company X’s stock option plan, 500 shares are reserved for issuance for these existing managers to purchase (each may purchase up to 100 shares at a fixed price) over the next two years. If any of these shares are not purchased within that timeframe, they revert to general authorized but unissued share status.