Company setup and early instruments
Authorized shares and founder stock
How a charter's share count, par value and restricted stock purchases turn a new C-corp into a cap table.
When you file the certificate of incorporation, you authorize a large pool of shares — commonly 10,000,000 shares of common stock at a tiny par value (for example $0.00001 per share). Those numbers are conventions, not economics. Founders then buy a large block of that common stock for a few dollars, under a contract that lets the company repurchase unvested shares if they leave.
Concept
Authorized shares are the maximum the company may issue under its charter. Issued shares are the ones actually sold or granted. Outstanding shares are issued shares still held by stockholders (not repurchased). A cap table tracks who owns the outstanding — and often fully diluted — shares.
The big idea
Think of authorized shares as blank pages in a notebook. Issuing stock writes on a page. You leave blank pages for an option pool, SAFEs converting into preferred and future rounds. Increasing authorized shares later means a charter amendment and stockholder approval — doable, but annoying mid-fundraise.
Par value is mostly a Delaware franchise-tax and corporate-law artifact. It is not the fair market value of the stock. Fair market value for tax and 409A is a separate analysis.
Walking through a formation
Authorized: 10,000,000 common shares, par $0.00001
Founder A buys: 4,500,000 shares × $0.00001 = $45.00
Founder B buys: 4,500,000 shares × $0.00001 = $45.00
Reserved later: option pool (unissued) from remaining authorizationBuying stock is not a handshake and a spreadsheet. Each founder signs a restricted stock purchase agreement: number of shares, purchase price, vesting/repurchase right, IP assignment cross-reference and book-entry restrictions.
The company usually keeps a repurchase option on unvested shares at the original purchase price. That is how founder vesting is implemented on stock that was already purchased — reverse vesting.
Common mistakes
- Treating par as the stock's value. Par is a legal artifact. 409A and tax use fair market value.
- Authorizing too few shares. You then amend the charter in the middle of a raise.
- Skipping the purchase agreement. A Notion "cap table" is not a ledger investors can diligence.
Check yourself
Two founders each buy 4,500,000 of 10,000,000 authorized shares at $0.00001. How much cash changes hands, and who owns the rest?
$45 each. The remaining 1,000,000 shares are authorized but unissued — often reserved later for an option pool.
Why leave headroom in the authorized count at formation?
Option pools, SAFE conversions and priced rounds all issue new shares. Amending the charter mid-raise costs time.
Key takeaways
- Authorize a large common share count (often 10 million) at a tiny par value.
- Founders purchase common stock at par under restricted stock agreements.
- Unvested founder stock is usually subject to company repurchase — reverse vesting.
- Par value is not fair market value.
Further learning
Next, how IP gets into the company: PIIA and IP assignment.