Capitalization Table 101: Authorized vs. Issued vs. Outstanding Shares
Written By Haley Kopp
Understanding your corporation's share structure is crucial for effective management. Yet one of the most common points of confusion for founders, employees, and even some investors is the difference between authorized, issued, and outstanding shares. These terms appear on cap tables, legal documents, and stock option plans, and they all mean different things.
Here’s a breakdown of what each term means, why it matters, and how it impacts your corporation’s ownership and fundraising plans.
1. Authorized Shares
Authorized shares represent the total number of shares the corporation is legally allowed to issue, as set forth in its Certificate of Incorporation.
Key Point: Think of this as the ceiling. It’s the maximum number of shares the corporation can hand out. However, the corporation doesn’t have to issue all of the authorized shares.
Why it matters: You may authorize more shares than you initially plan to issue to keep flexibility for future fundraising, equity grants, or strategic deals. If you ever need to issue more than the authorized amount of shares, you’ll have to amend your Certificate of Incorporation,
which will require board and/or stockholder approval.
2. Issued Shares
Issued shares are the portion of the authorized shares that the corporation has actually granted or sold to stockholders, including founders, investors, and employees.
Key Point: Once shares are issued, they are no longer available for issuance to someone else unless they are repurchased or forfeited.
Why it matters: Issued shares reflect who owns stock in the corporation (or has owned shares in the past). Some issued shares may not be outstanding anymore (see below), especially if the corporation has repurchased them. Only outstanding shares receive stockholder rights, such as dividends or voting rights; therefore, it’s essential to understand that a share can be issued but not be outstanding.
3. Outstanding Shares
Outstanding shares are issued shares that are currently held by stockholders (i.e., not repurchased or canceled).
Key Point: Outstanding shares are the shares that count when calculating ownership percentages and voting power. Outstanding shares are also the basis for determining things like earnings per share and the impact of future dilution.
Why it matters: If a corporation has repurchased any shares or if any stock has been forfeited or canceled, those shares are no longer outstanding, even though they were previously issued. This distinction is important when calculating required stockholder votes, determining who
obtains a dividend, modeling dilution, or preparing for an exit.
An Example to Tie It Together
Let’s say your Certificate of Incorporation authorizes 10 million shares.
You issue 6 million shares: 3 million to Founder A, 1 million to Founder B, and 2 million to early investors.
Later, 500,000 of those shares are repurchased from a departing Founder B.
In this case, the breakdown is:
Authorized Shares: 10 million
Issued Shares: 6 million
Outstanding Shares: 5.5 million
Ownership percentages:
○ Founder A: 54.55% (3 million/5.5 million)
○ Founder B: 9.09% (500,000/5.5 million)
○ Early Investors: 36.36% (2 million/5.5 million)
The remaining 4 million authorized but unissued shares allow the corporation to issue more stock in future rounds or for an employee option pool without needing to amend the certificate of incorporation (yet).
Final Thoughts
While these terms might seem technical, getting them right is critical for accurate cap tables, clean financings, and informed decision-making. Whether you're a founder reviewing your ownership percentage, an investor modeling dilution, or a team member negotiating equity, understanding the distinction between authorized, issued, and outstanding shares will help you confidently navigate the equity landscape
Adam Yohanan is a transactional business lawyer with extensive experience representing companies, investors, and entrepreneurs in a wide range of high stakes business transactions.
Adam handles the small and large transactions in the life of a businesses, including mergers & acquisitions, entity formations, partnerships and joint ventures, investing and fundraising, commercial contracts, and dissolutions. His office can be reached at 212-859-5041.
Haley Kopp is a corporate lawyer focused on representing start-ups and small companies in formations, venture capital, angel investor financings, mergers and acquisitions, and general corporate matters.
Haley's diverse experience gives her a practical approach to solving complex business issues, whether guiding companies through financing rounds or corporate transactions. Her office can be reached at (619) 512-3652.
This guide is meant for educational and informational purposes only and should not be considered legal advice. It is essential to consult with an attorney or other advisors regarding all legal and other important matters.
