The Answer

It depends. The number of authorized shares only matters if you plan on issuing stock options to employees, raising outside money from investors, or taking your company public. If you plan on any of these, you need to pay attention to the capital structure of your company from the beginning because if setup correctly, it can save you significant time, effort, and legal fees in the long run. If you do not plan on issuing stock options, raising money from investors, or taking the company public, you can pick any number you want (but pay attention to possible tax and filing fee consequences) and divvy them up between the co-founders accordingly. Otherwise, we recommend authorizing somewhere in the neighborhood of 10M shares, with 8M to 9M set aside for the founders and if necessary, the rest set aside for an option pool.

Why?

The 10M shares number is derived by working backwards from the requirements of a successful IPO. Conventional wisdom suggests that a $300M market cap is the minimum needed for a successful IPO because many institutional investors will not even touch a company with less than a $100M market cap. To get there, one needs to assume that you have 20M outstanding shares priced at $15/share for the initial IPO price. Starting with 10M shares at authorization leaves plenty of room to authorize additional shares when needed during a later financing.

Monetary Consequences: Taxes and Filing Fees

Some states, such as Delaware base their filing fees and franchise taxes off of the number of initially authorized shares and/or initial capital, so generally the larger the amount of authorized capital, the higher the filing fee or franchise tax bill. On the other hand, Texas does not base filing fees or franchise tax on the number of authorized shares. Texas has a fixed filing fee, and the franchise tax (now called margin tax) is based off of revenue.