Most startups authorize 10 million shares of common stock at formation and issue roughly 80 to 90 percent of them to the founding team, holding the rest in reserve for employees and future investors. That ratio is a convention, not a rule, and the right number of shares to issue for your startup depends on how many founders you have, how aggressively you plan to hire with equity, and how your state calculates franchise tax on authorized shares.
Why 10 Million Is the Common Starting Number
Ten million shares has become the default for venture-track startups because the arithmetic stays clean at every valuation. At a $1 million valuation each share is worth $0.10. At $10 million each share is worth $1.00. That simplicity matters when you’re negotiating with investors, granting options, or dividing equity among co-founders who put in different amounts of cash and effort.
A high share count also avoids fractional shares. If you authorize only 1,000 shares and want to give a key hire 0.3 percent of the company, you’re issuing 3 shares and hoping later math stays tidy. With 10 million shares, that same 0.3 percent is a clean 30,000 shares. The granularity lets you make precise ownership adjustments without rounding errors that compound.
Some founders start lower, at 1 million shares, and others go higher. Both can work. The pressure to deviate from 10 million almost always comes from one of two directions: your state’s franchise tax formula, or your plans for how much equity will change hands in the first few years.
Authorized Shares Versus Issued Shares
Your articles of incorporation set the maximum number of shares the company is allowed to issue. That ceiling is the authorized share count, and it is not the same as the number actually distributed to shareholders. You might authorize 10 million and issue only 5 million to founders on day one, keeping the rest in reserve.
That buffer lets the board bring on investors, grant equity to employees, and handle ownership changes without going back to shareholders every time to raise the cap. The tradeoff is that some states charge more in franchise tax when you authorize more shares, so overshooting carries a real annual cost.
How Par Value and State Taxes Shape the Number
Par value is a legal relic that still appears on incorporation paperwork. It represents the minimum price at which a share can be sold, and most corporations set it at a tiny fraction of a cent. Apple uses $0.00001 per share. Amazon uses $0.01. A nominal par value keeps initial issuance affordable and avoids inflating state taxes calculated against total par value.
Your articles must state whether the stock carries a par value or is designated no-par stock. Some states compute franchise tax based on total par value of authorized shares. Setting par value at $1.00 on 10 million authorized shares creates $10 million in stated capital, which can trigger a dramatically higher tax bill than setting par value at $0.0001. The difference between those two choices can run into thousands of dollars a year.
Other states use an authorized shares method, charging fees based on the share count regardless of par value. Under that approach, a corporation with 5,000 or fewer authorized shares might owe a minimum annual tax of around $175, while 10 million authorized shares would produce a bill of roughly $85,000. An assumed par value capital method, which factors in actual assets and issued shares, often produces a much lower number. Corporations in states that offer both methods should calculate under each and use whichever is lower.
The practical takeaway: before you lock in 10 million authorized shares at any particular par value, check how your state of incorporation computes franchise tax. The right par value and the right share count are the ones that keep your annual bill reasonable.
How Much to Reserve for Employees and Investors
Most startups set aside 10 to 20 percent of their shares for an employee equity incentive pool. These reserved shares fund stock options and restricted stock grants that help attract talent when salaries aren’t competitive. Building the pool into your initial count is far easier than expanding it later, which requires amending your charter and typically dilutes existing holders in ways investors will scrutinize.
Pool size depends on hiring plans. A two-person company that intends to stay lean might reserve 10 percent. A team planning aggressive early hiring with equity-heavy packages might need closer to 20 percent. Venture investors often negotiate the pool during funding rounds, and they generally expect it to come out of the founders’ share rather than be added on top.
External funding adds another layer. Venture investors typically take preferred stock that converts into common at a set ratio. A roomy authorized count makes dilution math straightforward when new money arrives. If you’ve authorized barely enough shares to cover current holders, every round forces a charter amendment before closing.
Common and Preferred Stock
Your articles can authorize more than one class of stock. Common stock is what founders and employees hold. It carries voting rights and a share of profits, but sits at the bottom of the priority list in a sale or liquidation.
Preferred stock is what investors usually receive. It has priority over common for dividends and liquidation proceeds, and it often includes a conversion feature that lets investors convert into common at a set ratio when the company goes public or is acquired. Many new corporations authorize both classes at formation even if they don’t plan to issue preferred immediately, because adding a new class later requires a charter amendment and shareholder approval.
Issuing the Shares After Formation
Filing the articles of incorporation brings the corporation into existence, but it does not put shares in anyone’s hands. That takes a separate step. The board of directors approves the initial issuance through a written resolution specifying how many shares go to each founder, the price per share, and what each founder is contributing in exchange. Contributions can be cash, intellectual property, or other assets of value.
The corporate secretary records each issuance in the stock ledger, which is the company’s definitive ownership record. The ledger tracks certificate numbers, share quantities, and the identity of each holder. Sloppy records create real problems during due diligence when you try to raise money or sell the company, and disputes over who owns what percentage can derail transactions.
Each shareholder receives a stock certificate, physical or electronic, as proof of ownership. Modern corporations increasingly use electronic certificates managed through cap table software that tracks transfers, vesting, and dilution automatically. In either format, total issued shares must never exceed the authorized limit set in the articles.
Founders typically receive their shares subject to a vesting schedule, usually four years with a one-year cliff. The company issues all the shares at once but keeps the right to repurchase unvested shares at cost if the founder leaves. The vesting terms belong in a restricted stock purchase agreement signed at the time of issuance.
File Your 83(b) Election Within 30 Days
When a corporation issues shares to a founder in exchange for services rather than cash, the IRS treats the fair market value of those shares as taxable income. Under Section 83 of the Internal Revenue Code, the tax is normally owed when the shares vest and are no longer subject to a risk of forfeiture, not when they’re first issued. For a founder on a four-year vesting schedule, that means recognizing income each time a batch of shares vests, at whatever the shares are worth at that point.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection with Performance of Services
That default rule becomes punishing for successful startups. If your shares are worth $0.001 each when issued but $5.00 each when they vest two years later, you owe income tax on $5.00 per share at vesting, before you have sold anything to generate cash. For founders holding millions of shares, the bill can be enormous.
The solution is a Section 83(b) election, filed with the IRS within 30 days of receiving the shares. The election tells the IRS to tax you now, based on current fair market value, rather than at each vesting date. When shares are issued at incorporation and the company is worth almost nothing, the taxable amount is negligible. All future appreciation is then taxed as capital gain when you eventually sell, rather than as ordinary income at each vesting milestone.2Internal Revenue Service. Section 83(b) Election Form 15620
The 30-day deadline is absolute. It cannot be extended, and the election cannot be revoked once filed. More founders lose money on this single deadline than on almost any other early-stage tax decision. File the 83(b) the same week shares are issued.
Securities Law Exemptions You’ll Rely On
Issuing shares is selling securities, and that triggers federal and state regulation even when the buyers are your co-founders. Under the Securities Act of 1933, every offer or sale must either be registered with the SEC or qualify for an exemption. Virtually no startup registers its initial issuance. Companies rely on private placement exemptions instead.
The federal exemption most startups use is Regulation D. Rule 506(b) permits sales to an unlimited number of accredited investors and up to 35 non-accredited investors in any 90-day period, with no general solicitation. Rule 506(c) permits general solicitation but requires every purchaser to be accredited, with verification. Rule 504 allows up to $10 million in sales over 12 months and is often used for smaller regional offerings.3U.S. Securities and Exchange Commission. Exempt Offerings
After the first sale under any Regulation D exemption, the company must file a Form D notice with the SEC within 15 days. The date of first sale is the date the first investor becomes irrevocably committed, not necessarily the date money changes hands.4U.S. Securities and Exchange Commission. Filing a Form D Notice
For equity granted to employees, consultants, and advisors as compensation under a written benefit plan, Rule 701 provides a separate exemption from SEC registration. A company can sell at least $1 million in securities under Rule 701 regardless of size, with higher limits based on assets or outstanding securities. If Rule 701 sales exceed $10 million in a 12-month period, the company must provide certain financial disclosures to recipients.5U.S. Securities and Exchange Commission. Employee Benefit Plans – Rule 701
Federal exemptions don’t erase state requirements. Every state has its own securities laws, commonly called blue sky laws, that may require separate registration or notice filings before shares can be sold to residents. Securities exempt under Rule 506 are also exempt from state registration, though states retain authority to enforce their anti-fraud provisions. If you’re issuing to investors in multiple states, confirm compliance with each state’s filing requirements before closing.
Changing the Share Count Later
If you run out of authorized shares or need more for a new funding round, you can amend your articles of incorporation to raise the cap. The typical process involves a board resolution proposing the increase, written notice to voting shareholders, a shareholder vote approving the amendment, and a filing with the secretary of state. Fees are usually modest; the real cost is the time and negotiation involved in getting shareholder approval, particularly when outside investors hold meaningful stakes.
If no shares have been issued yet, the board can often approve the amendment without a shareholder vote. Once shares are outstanding, existing holders get a say, because raising the authorized count dilutes their ownership percentage. That is precisely why setting a sensible authorized count at formation matters. Too few shares forces repeated amendments. Too many can inflate your annual franchise tax. The number you want is large enough to cover your first several years of hiring and fundraising without creating unnecessary tax exposure, and for most startups that number lands at 10 million.