What Are Authorized Shares?

If you've ever looked at a cap table or gone through the process of incorporating a company, you've likely come across the term authorized shares. 

What are authorised shares?

Authorized shares are the maximum number of shares a company is legally permitted to issue, as outlined in its charter document (often called the Articles of Incorporation/Memorandum of Association). This number is approved by the company’s founders and, in many cases, its board or shareholders.

Think of authorized shares as your company’s total inventory of potential shares. 

However, this doesn’t mean all of them are in use. 

Only a portion of authorized shares may actually be issued to founders, employees, or investors. The rest remain unissued and can be allocated in the future for new financing rounds or employee stock options (ESOPs).

For example:

Let’s say your company has 1,000,000 authorized shares. At the time of incorporation, you issue:

500,000 shares to the founders

100,000 shares to employees (via an ESOP pool)

200,000 shares to early investors

That means you’ve issued 800,000 shares, and you still have 200,000 authorized but unissued shares. These remaining shares can be used in the future for another funding round.

Can you change the number of authorized shares?

Yes.

To change the number of authorized shares, whether increasing or decreasing, your company must obtain approval from both the board of directors and the shareholders.

Once approved, you’ll need to file an amendment to your company's charter document (such as the Articles of Incorporation or Memorandum of Association, depending on your jurisdiction).

For many companies, it’s common to begin with a modest number of authorized shares and increase the count as the company grows and raises capital.

How are authorised shares different from issued and outstanding shares?

What are authorized shares?

Authorized shares refer to the total number of shares a company is allowed to issue. This is the maximum "inventory" of shares the company can distribute, though it doesn’t mean all of them are actually in circulation. 

What are issued shares?

Issued shares are a subset of authorized shares that have been allocated to shareholders, including founders, investors, and employees (through exercised ESOPs). 

While the number of issued shares can increase over time, it cannot exceed the total number of authorized shares.

What are outstanding shares?

Outstanding shares are issued shares that are currently held by shareholders. It excludes:

- Treasury shares – shares that were issued but later repurchased by the company.

- Unexercised ESOPs – even if options have been granted or vested, they don’t count as outstanding until the employee actually exercises their options.

So, while all outstanding shares are issued, not all issued shares are outstanding.

What is authorised share capital?

Authorised share capital is the maximum value of share capital that a company is legally permitted to issue to shareholders. This limit is defined at the time of incorporation and can be increased later as the company grows.

For example, a company may be incorporated with an authorised share capital of $10,000, divided into 10,000 authorised shares with a face value of $1 each. 

The face value (or nominal value) represents the base value of the share, but it is not necessarily the price investors pay. In most cases, shares are issued at a premium based on the company’s current valuation or market worth.

In some jurisdictions, companies are required to maintain a minimum authorised or paid-up share capital.

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How is authorised share capital different from issued and paid-up share capital?

Share capital refers specifically to the nominal (or face) value of the shares issued by a company.

There are three types of share capital:

a. Authorized share capital is the maximum amount of share capital that a company is allowed to issue.

b. Issued share capital is a subset of authorised share capital. It refers to the portion of shares that the company has actually issued to shareholders.

c. Paid-up share capital, on the other hand, is the amount of money the company has actually received from shareholders in exchange for the shares they hold.

In many cases, especially for private companies, the issued and paid-up capital are the same because shares are typically paid for in full when issued. However, if shareholders haven’t paid the full amount for their shares (in jurisdictions where partial payment is allowed), the paid-up capital may be lower than the issued capital.

FAQs

1. How can I find a company’s authorised shares?

You can find a company’s authorised shares in its Memorandum of Association (MoA) or Articles of Incorporation, depending on the jurisdiction. These documents specify the maximum number of shares the company is allowed to issue.

For public listed companies, this information is typically available in regulatory filings, annual reports, or on the stock exchange’s website. 

2. What is the authorised share limit?

The authorised share limit is the maximum number of shares a company is permitted to issue, as defined in its charter documents (e.g., MoA or Articles of Incorporation). It acts as a legal cap on the total number of shares the company can create and distribute.

3. Can a company change its authorised shares?

Yes, a company can increase or decrease its authorised share capital. This typically requires:

- Board and shareholder approval

- A formal resolution

- Regulatory filings with the relevant authority 

The process varies by jurisdiction but usually involves updating the company’s constitutional documents.