A corporation’s “authorized shares” represent the total number of shares that the company is permitted to issue. This number is specified in the company’s charter (in Delaware, called the “Certificate of Incorporation”), which is a key governing document for a corporation and for Delaware corporations, is filed with the Delaware Secretary of State. A company cannot issue more shares than it has authorized in its charter.
A company can increase or decrease its number of authorized shares, but doing so involves obtaining board and stockholder approval and making another filing with the Secretary of State documenting the change. This takes time and money, including legal and state filing fees. To help companies avoid incurring this expense too often during its early stages, many companies elect to build in a buffer of extra authorized shares at incorporation (e.g. a 5 million share buffer with 10 million shares actually issued to founders, for a total of 15 million shares authorized in the charter).
This authorized share buffer gives the company flexibility to, for example, add a new co-founder, increase the size of the option pool to accommodate more hiring than originally anticipated, or even to join and issue shares to an accelerator program, all without the need to file an amendment to the company’s charter.
Note that, though having 10-15 million shares authorized at incorporation is fairly typical for startups, the percentage of the company held by a given stockholder is really the important number. A stockholder may own 1,000 shares or 1 share, but both may represent the same 0.01% of a company depending on how many shares are actually authorized and (most importantly) issued. However, for most startups, authorizing millions of shares makes the most sense as it enables them to divide the company’s ownership into much finer pieces so that they can issue stock to employees and other service providers as the company grows.
Related article: What are issued and outstanding shares?