How to set up your company’s share structure the right way

When you set up your company, one of the first things you’ll need to decide is how to divide the ownership of the shares.

It’s tempting to allocate all the shares to you and your co-founders so you ‘own 100% of the company’. But that’s not the best approach. Getting this right at the start makes things easier when hiring early employees down the line.

In this article, we’ll explain:

• the difference between authorized and issued shares,
• how to save yourself admin and keep flexibility for share awards, and
• how much room you should leave in your cap table at the start.

What’s the difference between authorized and issued shares?

When you form a Delaware C-corp (which is the standard structure for most startups), you set a specific number of authorized shares. This is the total number of shares that are authorized to be granted to shareholders. This number is found in your Certificate of Incorporation.

Issued shares are the shares the company has actually granted to shareholders, usually to the founders and early team members.

So, if your company has 10 million authorized shares and you’ve issued 6 million, that means 4 million remain unissued – they’re available to issue in the future (for example, when hiring or for creating an option pool).

Why is it helpful to leave some shares unissued?

Let’s say you authorize 10 million shares when you incorporate (this is a common starting point). You and your co-founder want to own the company 50/50, so you issue all 10 million right away (5 million each).

A few months later, you want to hire a top-tier CTO and offer them 5% equity.

But at that stage, all your stock has already been issued. That means you’ll have extra paperwork to do before you can grant more shares.

At incorporation, your company will typically only have ‘common stock’. When you raise your first investment round, you’ll usually issue ‘preferred stock’ to investors. So you’ll need to update your Certificate of Incorporation and authorize more shares at that point anyway.

So, you’ll have to choose one way to do this.

You’d need to either authorize more shares, transfer shares, or find another workaround. We cover each of these options in detail later in this article.

Leaving 20-30% of your authorized shares unissued at the start means you can issue common stock to early team members without having to update your Certificate of Incorporation before your first funding round.

You’ll still need to authorize more shares when you do your fundraise to create preferred stock for investors. But this just avoids having to do it twice.

How much should founders issue to themselves?

A good starting point is to issue 80% to 90% of your authorised shares to the founding team when you incorporate.

That leaves 10% to 20% unissued, giving you flexibility for things like early hires, granting equity to advisors, or creating or expanding your employee option pool. This is most useful if you expect to do any of these things before raising your first funding round.

Here’s how that might look in reality:

Let’s say you’re two co-founders setting up your startup. You want to split ownership equally and leave room for hiring and growth.

You authorize 10 million shares.

You issue 9 million shares, split between the founders.

• Founder A: 4.5 million
• Founder B: 4.5 million

That leaves 1 million unissued in reserve.

This reserve gives you the flexibility to easily do things like set up an employee option pool or offer equity to key hires or early team members.

You don’t need to get the numbers perfect from day one, but starting with a flexible structure makes it much easier to grow your team and bring in investment later.

If your founding team isn’t fully in place yet, it might be worth having a bigger reserve, maybe leaving 40-50% unissued.

I’ve issued 100% of the authorized shares. What can I do?

If you’ve already granted all your authorized shares, don’t panic. You have a few ways to go:

Option 1: Authorize more shares

You can do this by filing an amendment to your Certificate of Incorporation in Delaware.

This requires:

• Board and shareholder approval
• Submitting filings with the Delaware Division of Corporations (you’d probably use a registered agent for this)
• Paying Delaware filing fees ($200-$500)

This is the cleanest and safest approach. We’ve even written a guide on filing an amended Certificate of Incorporation.

Option 2: Transfer shares

You could transfer shares from a founder to a new team member.

But this may:

• Forfeit QSBS benefits: QSBS only applies to shares issued directly by the company, so both the founder and the recipient could lose potential tax advantages. Our QSBS guide for founders tells you how it works.
• Trigger gift or capital gains tax: If the shares have value, transferring them might count as a taxable event. The IRS could treat it as a gift (potentially subject to gift tax) or a sale (triggering capital gains tax), even if no money changes hands.
• Raise red flags with investors: Informal share transfers can make your cap table look messy. Future investors might also question how equity decisions have been handled and whether proper governance is in place.

Option 3: Buy back and re-issue

The company could buy back shares from the founders and reissue them to someone else.

But this approach could:

• Trigger capital gains tax for the founder,
• Trigger ordinary income tax for the recipient, and
• Invalidate QSBS. QSBS requires shares to be newly issued by the company and held for five years. So reusing shares breaks that rule.

So, use this option with caution and only with legal advice.

Set up your cap table the right way from day one

Are you setting up your startup?

SeedLegals makes it easy to get your share structure right, from the start.

We’ll help you:

• authorize shares,
• issue founder equity,
• create an option pool, and
• manage your cap table as you grow.

No spreadsheets, filing headaches or share structure issues. Just one simple platform built for startup founders.

Book a call below or start your 7-day free trial today.