incorporation, shares, c-corporationI am researching legal documents for corporation forming and it seems that authorised stock is usually issued in millions, i.e 10,000,000 shares. I wanted to understand when this benefits the startup as opposed to say 5,000 shares?
Also, if starting with 5,000 is it generally easy to adjust these to 10,000,000 if needed? Does this have serious implications?
If you don’t have enough shares initially to accommodate for future capital raises and dilutions at much larger valuations, you end up in one of two situations:
Berkshire Hathaway A-shares valued at $100k+ a pop. (The small investor friendlier B-shares were worth a few thousand too until a split a few years ago.) Having a very high value stock is a good way to avoid the evils of naked short selling by limiting liquidity, but it also kind of limits who can invest in your business in practice - not to mention how you can give stock options to employees. :-)
Repeated occurrences of share splits. There’s nothing particularly wrong with those, of course, but why not postpone the paperwork until you’re so seriously successful that it won’t matter?
You can of course introduce new share classes, as hinted in the first case, to work around the above issues. And you often do anyway for other reasons, such as giving shares with little to no voting power to investors you care less about. So no serious implications either way in my opinion.
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