As a founder who has decided to incorporate a company, one of the first questions you’ll probably ask is “how many shares will the company issue?”.
Companies in many jurisdictions (including Abu Dhabi Global Market (ADGM)) use the concept of “authorised share capital” and “issued share capital” when describing their size and ownership structure. The Q&A below will help you to make sense of the differences between these concepts. Although the below is specific to ADGM companies, there are similar concepts in many other jurisdictions around the world.
What does “authorised shares” mean?
The authorised share capital is the total amount of shares that shareholders have permitted the directors to issue without further reference to them (i.e. shareholder consent is not required for the board of directors to issue additional shares to incoming investors).
How do I decide how many authorised shares to have?
There is no right or wrong answer here. A new company should think about how many shares it wants to issue to shareholders upon incorporation and also include some room for growth (e.g. if it envisages more shareholders coming on board in the short to medium term).
What happens if I want to increase the amount of authorised shares?
You can increase your authorised share capital by passing a resolution and filing a notification with the ADGM authority. A fee of US$125 is payable.
What does “issued shares” mean?
The issued share capital is the total amount of shares which have been allocated by the company to its shareholders. The number of issued shares, and their allocation to shareholders, reflect the ownership of the company.
If my company has 1,000,000 authorised shares and 100 issued shares and I own all the issued shares, do I own the company?
If you are the sole shareholder of the company and hold all the issued share capital, you would own 100% of the company. If there are 100 issued shares and you own all of them, you own 100% of the company even if the company has 1,000,000 authorised shares.
Employee Share Option Plans
Are shares in an employee share option plan issued shares?
A company may reserve some shares to use in an ESOP. These shares have been earmarked for employees but they have not yet been issued.
What rights does an employee with share options have?
An employee who has a share option has a contractual right to purchase the shares at an agreed price and on the terms set out in the plan. The shares are not issued shares until the employee exercises the option.
Think of the capital structure of your company as a garden
You need to fence off some land (authorise shares) before you plant a single seed (issue a share). The area of land inside the fence is the greatest number of shares your company can issue.
Each plant in the garden represents an issued share in your company. There are lots of things you can do with your plants: you and/or your co-founders might buy some of the plants, other keen gardeners might also buy your plants and you could also sell plants to some of your employees using an employee share option plan.
In the early days, your garden has plenty of empty space where you haven’t planted any seeds (this empty space represents authorised, but unissued, shares). Your plants need room to grow. When you are talking about ownership of your company, it doesn’t matter how much empty space there is in your garden: your ownership is represented by how many of the plants growing in the garden are yours. If you have planted 100 plants in your garden and you own 75 of them and your co-founder owns the other 25 plants, your ownership is 75% and the co-founder’s ownership is 25%, regardless of how much empty space lies around your plants. When, and only when, there are more plants in the garden, your ownership percentage will change.