Why authorised stock matters to a first-time founder
Authorised stock sets an upper limit on shares the company can issue without first changing the relevant legal formation document, where that concept applies. Founders need enough unused capacity for founder shares, investment and employee options, while understanding that authorisation alone does not issue shares or approve a transaction.
Examples of authorised stock
A US corporation authorises 10 million shares in its formation document but initially issues 6 million to founders and sets aside 1 million for employee share options. Three million remain authorised but unissued. Issuing them later still requires the appropriate company approvals and compliance with applicable documents and law.
Common misunderstanding
Authorised shares are the ceiling. Issued shares have been allocated, outstanding shares remain held by shareholders, and reserved shares are set aside for a stated purpose. The authorised number is not the current ownership record, often called a cap table. Jurisdictions use different terminology and may not use this model at all. Increasing the ceiling can require shareholder approval and a formal filing.
When to use it
Review authorised share capacity before incorporation, increasing shares set aside for options or raising finance. Compare it with issued shares, securities that may convert into shares, rights to buy shares and reserved options. Ask local corporate counsel to confirm terminology, approvals, existing shareholders’ rights to buy new shares first, and filing requirements before changing or using the authorisation.
US spelling: authorized stock.