authorised shares

Think of a landlord who builds a compound with room for twelve flats, even though only eight are occupied right now. The plan allows for twelve, the paperwork says twelve, but the landlord can rent them out slowly, one at a time, as tenants come. Authorised shares work the same way for a company. When a business registers with the Corporate Affairs Commission in Nigeria, its memorandum and articles state a ceiling, say 10,000,000 shares, even though the founders might only issue 1,000,000 of those at first.

The number that is actually given out to shareholders is called issued shares, and it can never be more than the authorised number. If a Lagos tech startup is authorised for 10,000,000 shares but has only issued 2,000,000 to its founders and early investors, it still has 8,000,000 sitting in reserve. That reserve matters a lot later, because it means the company can bring in new investors, reward staff with share options, or raise fresh capital without first going back to shareholders to ask permission to expand the ceiling.

In the United Kingdom, a company's authorised share capital used to be a mandatory line in its constitution, though the Companies Act 2006 relaxed this so many newer companies simply state a number of shares on incorporation without a formal ceiling. Older UK companies still carry the concept in their articles, and it works the same logic wherever it appears. It is a permission slip, not a promise. Having room for more shares does not mean the company must sell them.

For founders and investors, the gap between authorised and issued shares is worth watching. A company that raises its authorised shares dramatically before a funding round might be preparing to issue a lot more equity, which can dilute existing shareholders if they are not paying attention. It is one of those calm details in company filings that tells you where the story is heading.