The jungle of financial lingo and legal jargon can disorient even the savviest entrepreneur. One patch that often trips up new business owners is the difference between a company’s authorized shares and its issued shares. Let’s trim this concept down to something easy to understand and look at an industry that is just as growth-obsessed as startups—the cutting-edge world of gardening.
Let's say that your company’s capital structure is a garden. Before you plant a single seed (issue a share) you’ll need to fence off some land (authorize shares). This empty land represents the greatest number of shares your company can currently issue.
Each issued share in your company is represented by a plant in the garden. You might purchase some of the plants. Your co-founders might buy plants. You might sell plants to some of your staff through your employee stock incentive plan.
When you start your garden, it’s natural to have lots of unplanted acreage (authorized, but unissued, shares), plenty of room to grow! The area without plants isn’t a factor when you discuss the ownership of your company...er, I mean garden. If there are 10 plants and you own 6 of them, you own 60%, no matter how many fallow plots exist. Your ownership percentage only changes when there are more plants.
Here’s to a bountiful harvest that will yield a good price at market!
Learn more about equity management in Fidelity here!