The number of authorized shares is the total number of shares your company is allowed to issue to its founders, investors, and employees. It is indicated on the Articles of Organization or the so-called Certificate of Incorporation.
The number of authorized shares suggested to start a company within the technology industry based on common practice is 10,000,000, which means the company has enough shares to issue to future co-founders and employees. This way, it is less likely that you will need to amend the Certificate of Incorporation, which has an additional cost, to increase the amount of the authorized shares to follow your company’s growth.
When you allocate part of the authorized shares to a founder, investor, or employee the shares are issued to a stakeholder/shareholder. The issued shares will be reflected on your Post-Incorporation documents and can be changed later on your end.
Companies usually reserve a number of shares to the founders or a parent company upon the corporation, which means the ownership is granted to the founders. At the same time, a small part of the authorized amount keeps available for issuance for future growth, which means it can be used in the Equity Plan, restricted stocks, or allocated to future co-founders. That being said, a corporation may decide to issue only 8,000,000 shares to the initial founder(s) out of 10,000,000 authorized shares, for instance.
On top of that, a company can also issue preferred shares to its investors during a financing round (this is when you raise money for your corporation) and add the authorized amount for the preferred shares on the Articles of Incorporation (Certificate of Incorporation) through an amendment.
The shares to the founders are normally common and restricted stocks. The stockholders need to pay a nominal (par) value set up as indicated in the Certificate of Incorporation to the corporation for purchasing the shares. These shares can be bought back by the company in case one of the founders leave the company. Shares mean ownership so if the owners want to transfer their shares to other stakeholders they can do so, partially or entirely, and get paid for the shares.
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