What it means
The figure lives in the company's articles or charter, not as a live balance in the accounts. It exists to stop directors from printing unlimited new shares and diluting existing owners without asking permission first.
Two other numbers sit underneath it. Issued share capital is what has actually been allotted to shareholders, and the gap between authorised and issued is the unissued headroom the board still has available.
That headroom matters most at fundraising time. If an incoming investor needs 2,500,000 new shares and only 2,300,000 remain unissued, the deal stalls until shareholders approve an increase, which can take weeks of notices and paperwork.
Many jurisdictions attach a nominal or par value to each share, e.g. $0.01, so authorised capital can also be quoted as a dollar amount. That figure is a legal artefact rather than a valuation, since 10,000,000 shares at $0.01 is $100,000 of authorised capital even when the business is worth $50,000,000.
For anyone reading a cap table, the practical habit is to check three columns rather than one: authorised, issued, and reserved but not yet issued. Options, warrants and convertible notes all have a claim on the unissued pool, so the genuinely free capacity is usually much smaller than the headline gap suggests.
Not every country still uses the concept. Some have dropped the stated ceiling entirely and replaced it with a directors' authority granted by shareholder resolution, while many others still require the number to appear in the constitution.
In practice
Real-world examples.
Example
A family manufacturing business incorporated with 1,000,000 authorised shares and issued 400,000 to the two founders. Twenty years later it wants to bring three managers into ownership and still has 600,000 shares of headroom, so no shareholder vote is needed.
Example
A biotech company preparing a Series B discovers its authorised ceiling leaves room for the new preferred shares but not for the enlarged option pool the investor is demanding. Legal counsel drafts a single resolution raising the ceiling and creating the new share class together, to avoid two separate shareholder meetings.
Example
A logistics group planning a stock split from 5,000,000 to 20,000,000 shares must first raise its authorised capital, because a four for one split multiplies the issued count and would breach the existing ceiling immediately. The resolution is administrative rather than economic, since every shareholder ends up with four times as many shares and exactly the same percentage of the company.
Formula
Calculation
Available shares = authorised shares - issued shares - shares reserved
A private company is authorised for 10,000,000 shares of $0.01 nominal value, so its authorised capital is 10,000,000 x $0.01 = $100,000. It has issued 6,500,000 shares and has reserved 1,200,000 for its employee option pool. Available headroom is 10,000,000 - 6,500,000 - 1,200,000 = 2,300,000 shares.
A new investor wants 2,500,000 shares, which is 200,000 more than the company can issue. The board therefore proposes raising the ceiling to 12,000,000 shares, which gives 12,000,000 - 6,500,000 - 1,200,000 = 4,300,000 available, enough for the round with 1,800,000 shares to spare. Authorised capital in dollar terms rises to 12,000,000 x $0.01 = $120,000, even though no money changes hands on the resolution itself.Case study
Seen in the real world.
The following is an illustrative and entirely fictional scenario. Harrowgate Instruments, an invented maker of laboratory sensors, was set up with 5,000,000 authorised shares of $0.01 each. The founders issued 3,000,000 to themselves, allotted 400,000 to two angel investors, and reserved 600,000 for staff options, leaving 1,000,000 shares of headroom that nobody thought about for four years.
When a growth fund offered $8,000,000 for 1,600,000 new shares, the company discovered it was 600,000 shares short of being able to complete. Under its articles, an increase needed 75% approval and fourteen days' notice, and one early angel who held 5% was travelling and unreachable for three weeks.
The round closed six weeks later than planned. In this illustrative case the delay cost the fictional company a hiring window rather than the investment itself, and the board's first act afterwards was to raise the ceiling to 20,000,000 shares so the question would not arise again.
Watch out
Common mistakes.
- Confusing authorised share capital with issued share capital, and reading the ceiling as the number of shares actually in existence.
- Treating the nominal value of authorised capital as a measure of what the company is worth, when it is purely a legal figure.
- Forgetting that shares reserved for an option pool or for outstanding convertible notes eat into the same headroom as a new investment.
Questions
People also ask.
Does authorised share capital appear on the balance sheet?
Usually only as a note in the accounts, since only issued and paid up share capital is recognised as an actual balance.
Can a company reduce its authorised share capital?
Yes, by shareholder resolution and subject to local company law, although it is far less common than increasing it.
Why not simply authorise a billion shares at the start?
Some jurisdictions charge fees or taxes based on the authorised amount, and investors dislike very large unissued ceilings because they make future dilution easier.
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