Optimizing Share Authorization for a Delaware C-Corp: Best Practices and Key Considerations

Introduction

When starting a tech company and choosing a Delaware C-Corp structure, one of the critical decisions is the share authorization. The amount of shares you authorize has significant implications for your company's structure, taxation, and fundraising. This article examines the best practices and key considerations in setting up share authorization for a Delaware C-Corp.

Best Practices for Initial Share Authorization

Most startups aiming for growth and potential IPO often authorize a range of 10 million to 12 million shares. This practice adheres to industry standards and helps align with the expectations of founders, lawyers, and investors. By authorizing this number of shares, you can provide a flexible and scalable foundation for your company's future growth.

The Vesting Program and Its Importance

Of the authorized shares, the majority are typically issued to the founders under a vesting program. This program involves a clawback mechanism where the founders gradually gain full ownership of their shares over a predetermined period. This approach not only aligns incentives but also protects the company in case the founders exit early.

Flexibility and Incremental Increase

While you can and should authorize a significant number of shares initially, the sharing structure is not set in stone. Delaware allows companies to increase the number of authorized shares in the future, providing flexibility as your company evolves. If you need more shares, you can simply request an increase, and there is no limit to the number of times you can do this. This flexibility ensures that your capitalization reflects the company's growth without the need for frequent administrative changes.

Franchise Tax Considerations

One crucial factor to consider is the state-mandated franchise tax. In Delaware, the lowest yearly franchise fee is $175 for companies with 5,000 shares or fewer. However, authorizing more shares, such as 10 million, will result in a higher annual tax of $400. While this might seem like a financial burden, it is crucial to balance this cost against the long-term benefits. Paying $400 annually is often a small price to pay for avoiding the complexities and costs associated with frequent share splits and the administrative overhead involved. Economically, you are better off spending on your legal and filing fees rather than saving a few dollars on franchise tax.

Consultation with Legal Experts

To ensure you navigate these considerations effectively, it is advisable to consult with an attorney who specializes in corporate law. A knowledgeable attorney can provide valuable insights and help you make informed decisions that align with your company's growth strategy and compliance requirements. Proper legal guidance ensures that your share authorization is not just optimal but also compliant with all relevant regulations.

Conclusion

Optimizing share authorization is a strategic decision that significantly impacts a Delaware C-Corp. By authorizing a substantial number of shares, implementing a vesting program, and utilizing flexibility, you can create a robust foundation for your company. While there are financial implications, the long-term benefits often outweigh these costs. Always consider the advice of legal experts to ensure your share structure is both efficient and compliant.