TLDR:
Authorized shares are the maximum number of shares a company is legally permitted to issue, as defined in its articles of incorporation, setting the ceiling for equity issuance.
Authorized vs. Issued vs. Outstanding
Authorized shares represent the legal cap. Issued shares are those actually created and distributed. Outstanding shares are issued shares currently held by shareholders (excluding treasury shares the company has bought back). For example, a company might authorize 100 million shares, issue 10 million, and have 9.5 million outstanding (with 500,000 in treasury).
Why Authorized Share Count Matters
Startups must maintain sufficient authorized shares to support future funding rounds, employee option pool expansions, and acquisitions. Running out of authorized shares can delay financings while shareholders vote to increase authorization. Best practice is to authorize substantially more shares than initially needed — Delaware C-Corps commonly authorize 10-15 million common shares at incorporation even if only 1-2 million are issued initially.
Increasing Authorized Shares
Increasing authorized shares requires amending the certificate of incorporation, which typically requires board approval and shareholder vote (often a supermajority). The process involves filing a Certificate of Amendment with the state and paying franchise tax on the increased authorization. In Delaware, franchise tax can be calculated by either the authorized shares method or assumed par value method — choosing the right method can save startups significant money.