What it means
When a company is formed, its charter or articles of incorporation set the maximum number of shares it is allowed to create, known as authorised shares. Only some of those are usually sold at the start, and the rest stay in the background as unissued stock.
The company can issue them later without having to ask for a change to its founding documents, provided the limit is not exceeded. Unissued shares are not owned by anybody, including the company itself.
They have no voting rights, receive no dividends and are not counted in ownership percentages or earnings per share. This is different from treasury stock, which is stock that was issued, then bought back by the company, and is held in reserve.
The size of the unissued pool tells you how much room a company has to raise money or reward people. A start-up may keep a large block unissued to cover future funding rounds and an employee share option pool, which is a set of shares reserved for staff.
If the pool runs out, the company needs shareholder approval to increase the authorised number, which takes time and gives existing owners a chance to object. Issuing from the unissued pool dilutes existing shareholders, because their percentage of the company falls even though they own the same number of shares.
For that reason boards usually need to act carefully and often must follow rules on pre-emption rights, which give current holders the first chance to buy new shares. Investors therefore read the unissued balance as a sign of potential dilution.
On the balance sheet, unissued stock does not appear as an asset or a liability. The share capital figure reflects only the shares actually issued, at their par value or stated value plus any premium received.
The number of authorised and issued shares is normally shown in the notes to the accounts, and the difference between them is the unissued amount.
In practice
Real-world examples.
Example
A software start-up has 20,000,000 authorised shares and has issued 12,000,000 to founders and early investors. It keeps 8,000,000 unissued, of which 2,000,000 are reserved for an employee option plan and the rest for a future funding round.
Example
A manufacturing company wants to pay for the purchase of a smaller competitor partly with new shares. The board checks that enough unissued stock remains and, because it does not, asks shareholders to approve an increase in the authorised amount.
Example
A retailer buys back 500,000 of its own shares and holds them as treasury stock. The finance team keeps these separate from unissued stock in its records, since the buyback shares were issued before and can be reissued without a new authorisation.
Formula
Calculation
Unissued shares = authorised shares - issued shares
Suppose a company is authorised to issue 10,000,000 shares and has so far issued 6,500,000. Unissued shares = 10,000,000 - 6,500,000 = 3,500,000. If the board later sells 1,000,000 of them at $4 each, it raises 1,000,000 x 4 = $4,000,000, issued shares rise to 7,500,000 and unissued shares fall to 2,500,000. An investor who held 650,000 shares moves from 650,000 / 6,500,000 = 10% to 650,000 / 7,500,000 = about 8.7%, which shows the dilution.Case study
Seen in the real world.
Brightwater Robotics is an illustrative, fictional company that was incorporated with 5,000,000 authorised shares and issued 4,200,000 in its first two years. Everything seemed fine until an investor offered $6,000,000 for a 15% stake.
To give the investor 15% of the enlarged company, Brightwater needed to issue about 741,000 new shares, but only 800,000 were left unissued and the board also wanted a 300,000 share option pool. The pool and the investor's shares together exceeded what remained.
The company called a shareholder meeting to raise the authorised number to 8,000,000, which delayed the deal by six weeks. The illustrative lesson is that authorising a generous number of shares at the start costs little, while running short later costs time and negotiating strength.
Watch out
Common mistakes.
- Treating unissued shares as owned by the company, when they belong to no one until they are issued.
- Counting unissued stock in earnings per share or ownership percentages, when only issued and outstanding shares are included.
- Confusing unissued stock with treasury stock, when treasury stock was issued earlier and later repurchased.
Questions
People also ask.
Can a company issue unissued stock whenever it likes?
Generally the board can do so up to the authorised limit, but company law, the articles and any pre-emption rights may require approvals or give existing holders the first offer.
Why do some companies authorise far more shares than they issue?
A large authorised number gives flexibility for future fundraising, acquisitions and employee plans without repeated shareholder votes.
Does unissued stock appear on the balance sheet?
No, only issued shares are recorded in equity, and the authorised and issued numbers are disclosed in the notes.
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