When you incorporate a private limited company through the MCA's SPICe+ form, you are asked for two capital figures that founders often confuse: authorized capital and paid-up capital. Understanding the difference between the shares your company is allowed to issue and the shares it has actually issued is the foundation of every cap table conversation you will have with a lawyer, an investor or a co-founder. This lesson explains that difference, shows how ownership percentage is really calculated, and introduces the "fully-diluted" view that serious investors always use.
Authorized versus issued shares
Authorized share capital is the maximum value of shares your company is legally permitted to issue. It is stated in the capital clause of your Memorandum of Association (MoA) and set when you incorporate. Under the Companies Act, 2013 you cannot allot shares beyond this ceiling. Many founders set a modest authorized capital at incorporation, for example between ₹1,00,000 and ₹10,00,000, and raise it later when a funding round needs more headroom.
Issued shares are the shares your company has actually allotted to real people from within that authorized ceiling. The hierarchy runs: authorized (the legal maximum), issued (allotted), subscribed (agreed to be taken), and paid-up (money actually received). Paid-up capital can never exceed authorized capital.
Two practical India-specific points:
- Since the Companies (Amendment) Act, 2015, there is no minimum paid-up capital to incorporate a private limited company, so you can start small.
- To raise your authorized capital later, you pass a shareholder resolution, amend the MoA and file Form SH-7 with the Registrar of Companies, paying additional MCA fees and stamp duty. Budget for this before a round closes.
How ownership percentage is calculated
Your ownership is not based on authorized capital. It is your shares divided by the total shares actually issued:
- Ownership % = (your shares) divided by (total issued shares), multiplied by 100.
Suppose two co-founders issue themselves 60,000 and 40,000 equity shares. The total issued is 1,00,000 shares, so they own 60% and 40%. Authorized capital might be far higher, say 10,00,000 shares, but the unissued shares belong to no one and carry no votes or economics. Only issued shares count.
What "fully diluted" means
The number above is your ownership on an issued basis. Investors, however, negotiate on a fully-diluted basis, which counts every share that would exist if every convertible instrument converted and every option was granted and exercised, even though that has not happened yet. In an Indian cap table, the fully-diluted count typically adds:
- The ESOP pool: shares reserved for employees. Investors usually expect a pool of roughly 10% to 15% before a priced round, and it is entered as a line even before a single option is granted.
- CCPS (compulsorily convertible preference shares), the standard instrument used by VCs and behind India's iSAFE notes, which must eventually convert into equity.
- Convertible notes and CCDs (compulsorily convertible debentures). For a DPIIT-recognised startup, a convertible note requires a minimum of ₹25 lakh per investor in a single tranche and can convert within a period of up to 10 years.
Why it matters: your fully-diluted percentage is always lower than your issued percentage, because the denominator is larger. When a term sheet says the ESOP pool will be created or "topped up" pre-money, that dilution comes out of the founders, not the incoming investor. Always ask whether a quoted percentage is on an issued or a fully-diluted basis.
A quick worked example
Say founders hold 8,00,000 shares, a new investor takes 2,00,000 CCPS, and you reserve 1,00,000 shares for an ESOP pool that has no grants yet. The fully-diluted total is 11,00,000. The founders' fully-diluted stake is 8,00,000 divided by 11,00,000, about 72.7%, even though not a single option has been granted.
Keep your cap table and filings in sync
Every allotment of shares must be reported to the Registrar of Companies in Form PAS-3, generally within 30 days, and recorded in your register of members. Your cap table is a management tool, but it must reconcile exactly with these statutory records. If they disagree, the statutory filing governs, so update both together every time you issue shares.