What it means
When a company is incorporated, its founders decide how many shares it may have. The number is often far larger than the number issued at the start, because raising the ceiling later requires a shareholder resolution and, in some jurisdictions, a filing fee.
A start-up might authorize 10 million shares and issue 2 million to its founders, leaving 8 million for investors, employees and future needs. A listed company might have 2 billion shares authorized and 1.2 billion outstanding.
The distinction matters in three situations. When a company wants to raise equity, grant options or make a share-based acquisition, it needs enough unissued authorized shares to do so; if it does not, it must first obtain shareholder approval to increase the authorization, which takes time and can be refused.
When an investor is assessing dilution risk, the unissued authorized shares show how much the company could issue without asking; a large gap gives the board freedom that some shareholders find uncomfortable, which is why many listed companies seek annual authority to issue only a limited percentage. And when calculating per-share metrics such as earnings per share or book value per share, only issued and outstanding shares count; authorized but unissued shares have no economic existence.
Some jurisdictions have abolished the concept. UK companies formed since 2009, for example, no longer have an authorized share capital; directors' authority to allot shares is instead granted by shareholders for limited periods and amounts.
US corporations retain authorized share limits in their charters. The practical effect is similar: shareholders control how many new shares directors can create.
Authorized stock is disclosed in the notes to the financial statements alongside issued, outstanding and treasury shares, and the numbers reconcile: authorized minus unissued equals issued; issued minus treasury equals outstanding.
In practice
Real-world examples.
Example
A start-up authorizes 10,000,000 shares at formation, issues 4,000,000 to founders, reserves 1,500,000 for an employee option pool, and sells 2,000,000 to seed investors, leaving 2,500,000 unissued.
Example
A listed company seeks shareholder approval at its annual meeting to increase authorized shares from 1 billion to 1.5 billion ahead of a planned share split.
Example
A shareholder group votes against a proposed increase in authorized stock, arguing that the board has not explained what it intends to issue the shares for.
Think of it
“Authorized stock is the maximum shares a company is allowed to issue-the legal ceiling.
Formula
Calculation
Unissued Authorized Shares = Authorized Shares minus Issued Shares
Outstanding Shares = Issued Shares minus Treasury Shares
Potential Dilution from full issuance = Unissued Authorized Shares / Outstanding Shares x 100%
Worked example. A technology company's charter authorizes 500,000,000 common shares. It has issued 320,000,000, of which 20,000,000 have been repurchased and are held in treasury.
- Outstanding shares = 320,000,000 minus 20,000,000 = 300,000,000
- Unissued authorized shares = 500,000,000 minus 320,000,000 = 180,000,000
- Potential dilution if all were issued = 180,000,000 / 300,000,000 = 60%
The company has 25,000,000 employee options outstanding and plans an acquisition paid with 40,000,000 new shares. Both fit within the 180,000,000 unissued shares, so no shareholder vote on authorization is needed, though the acquisition itself may require approval under listing rules if it exceeds a size threshold.
Earnings per share uses outstanding shares (and, for the diluted figure, the options): with net profit of $450,000,000, basic EPS = $450,000,000 / 300,000,000 = $1.50. The 180,000,000 unissued shares play no part.
If the company later wanted to authorize an additional 200,000,000 shares to fund a large stock-based acquisition, it would need to put a charter amendment to a shareholder vote, and institutional investors would typically ask why so much headroom was required.Case study
Seen in the real world.
A fast-growing private company had authorized 5,000,000 shares at incorporation and, after four funding rounds and several option grants, had issued 4,800,000. When a strategic investor offered to invest $20 million for 1,000,000 new shares, the company discovered it could issue only 200,000 without amending its charter. The amendment needed approval from holders of a majority of each class of preferred stock, and one early investor, unhappy with the terms of the new round, used the vote as leverage to negotiate better anti-dilution protection.
The delay cost six weeks and a concession worth several hundred thousand dollars. The company's lawyers subsequently increased authorized shares to 50,000,000 with the round, so that the question would not arise again for years. The founder's observation was that a number chosen casually at incorporation had become a negotiating chip in the company's most important financing.
Watch out
Common mistakes.
- Using authorized shares in per-share calculations. Only outstanding shares represent actual ownership.
- Setting authorized shares too low at incorporation, forcing repeated charter amendments as the company grows.
- Assuming a large unissued authorization is harmless. It is the board's capacity to dilute existing holders, and investors watch it.
Questions
People also ask.
What is the difference between authorized, issued and outstanding shares?
Authorized is the maximum permitted. Issued is the number actually created and sold. Outstanding is issued less shares the company has bought back and holds in treasury.
Can a company issue more than its authorized shares?
No. It must first amend its charter with shareholder approval to raise the limit.
Do authorized shares affect the company's value?
No. They are a legal ceiling, not an economic quantity. Value per share depends on outstanding shares and potential dilution from options and convertibles.
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