What are authorized shares?
What are authorized shares?
There are two types of shares – authorized shares and issued shares. Issued shares are those that have been given to and paid for by shareholders in a company, whereas the term authorized shares – or authorized share capital – refers to the maximum amount of shares that can be issued. So, issued shares will reflect the ownership situation of a company at any given time, but there may be a large amount of additional authorized shares that can be issued by directors in the future. Basically, authorized shares are the shares available to issue but aren’t yet necessarily owned by anyone. When a company incorporates, it will usually do so with significantly more authorized shares than are issued to founders. This is because down the line, they will want to issue more shares to external investors and holders of options, warrants and convertible instruments. It is much easier to authorize a large number of shares at incorporation than at a later date.
To give a simple example, a startup might initially issue 200 shares, spreading them among founders or perhaps allocating them all to a single individual. So, if you hold 50 of those shares you own 25% of the company, and if you hold all 200 shares, then you own 100% of the company. At the same time, the directors might agree in the company’s Charter/Articles of Incorporation to have 100,000 authorized shares, meaning, in this instance, that 99,800 of those shares have been held back at the outset and are available to be issued in the future. These are the authorized but unissued shares.
So, issued shares are the shares that have been given or sold, whereas when we speak of authorized shares we are referring to the total amount of shares that can be given or sold. Think of it in terms of land – picture a large field and for that area to represent the authorized shares. You might initially plant seeds in one corner of that field, with each seed representing one issued share. No matter how big the field is, ownership will be linked to the number of plants growing in it only. If, over time, more parts of the field are seeded, then the ownership percentage situation will change.
Most jurisdictions have removed the requirement to put a limit on the authorized shares. This means that, in theory, a company can have an unlimited number of authorized shares, but this doesn’t impact one way or another on the value of the company. It just means the company will never run out of new shares to issue.
Where a company does have an authorized share capital in place, it will typically need to first pass a board resolution and then file confirmation of the increase with the Companies Registration Office. The relevant Registrar of companies in the local jurisdiction. Any changes to the authorized share capital will also requirement an amendment to the companies Articles of incorporation/Constitution.
It may be stating the obvious, but it is also important to note that the number of issued shares can never exceed the number of authorized shares. Also, in practice, it is the norm for companies to retain a certain percentage of authorized share capital, rather than ever issue 100% of all available shares. The Global Shares Growth platform will prevent you from ever making mistakes when it comes to your authorized share balance Every new transaction will reference the unused portion of your authorized share balance and prevent you from issuing more shares than you are legally allowed too. The percentage of issued and unused authorized shares displays on the company homepage to remind you or when it might be time to increase that reserve.
How do authorized shares impact your company?
As stated above, issued shares capture the ownership picture in a company, whereas authorized shares when issued can alter the ownership structure.
Taking the example offered above, if I hold 50 of the original 200 issued shares, that equates to a 25% ownership stake. If a further 200 shares from the 99,800 remaining authorized shares are subsequently given to outside investors, then I will hold 50 out of 400 issued shares; so, in that scenario, my ownership stake has been reduced to 12.5%, even though I hold the same number of shares and the company now has 99,600 authorized shares still on hand.
What to do when it’s wrong?
It is important to incorporate your company with an appropriate number of authorized shares and with the right value attached to them. A misstep on this point at the outset can create unnecessary headaches.
For example, a classic error is for founders to create one million shares, at a nominal value of £1 each. While this might seem reasonable at first glance, what you’ve actually done here is tell the world that you have £1 million in the bank – which most likely will not be the case. Also, you have effectively created a personal debt, whereby a founder or founders owe the company £1 million for the shares they hold.
If you are going to incorporate with a large number of shares, it is far better to set a low nominal price per share. The logic here is that this will make for a more manageable total paid-up capital figure. So, if you opt for one million shares, but set the nominal value at £0.0001, then the total capital will be £100, a far more manageable scenario than the one set out in the previous paragraph.
On the point of how many shares to incorporate with, it will depend on a number of considerations, not least of which being to ensure a reasonable price per share for your investors.
On what to do if you make a mistake at the outset, let’s go back to our first example – setting up with paid-up capital of £1 million. Assuming you can’t pay for those shares, you have two alternatives open to you:
1. Set up a new company: If all you have done up to this point is incorporate your company, then this option will represent only a minor inconvenience. Set up again under a new name and this time make sure you settle on a more practical nominal value per share.
2. File the appropriate paperwork: If you are already trading, then you might reasonably want to continue in your current identity, rather than starting all over again. If so, completing whatever paperwork is required and returning it to the Registrar of companies in your jurisdiction should allow you to reduce your share capital. The paperwork route will also require that you produce a director solvency statement, a written resolution, and a statement of compliance.
Where can I find this information?
The number of authorized shares will be detailed in your companies Articles of Incorporation. If the number of authorized shares has been increased post incorporation, you will need to reference the Amended Articles of incorporation to get the most up to date figure.