Counting Shares

3 minutes, 5 links
Holloway Guide ToEquity Compensation

Counting Shares

Common questions covered here
How are outstanding shares counted?
What is the difference between authorized but unissued, issued and outstanding, and fully diluted shares?

There are some key subtleties you’re likely to come across in the way outstanding shares are counted:

Definition Private companies always have what are referred to as authorized but unissued shares, referring to shares that are authorized in legal paperwork but have not actually been issued. Until they are issued, the unissued stock these shares represent doesn’t mean anything to the company or to shareholders: no one owns it.

confusion For example, a corporation might have 100 million authorized shares, but will only have issued 10 million shares. In this example, the corporation would have 90 million authorized but unissued shares. When you are trying to determine what percentage a number of shares represents, you do not make reference to the authorized but unissued shares.

confusion You actually want to know the total issued shares, but even this number can be confusing, as it can be computed more than one way. Typically, people count shares in two ways: issued and outstanding and fully diluted.

Definition Issued and outstanding refers to the number of shares actually issued by a company to shareholders, and does not include shares that others may have an option to purchase.

Definition Fully diluted refers to all of the shares that a company has issued, all of the shares that have been set aside in a stock incentive plan, and all of the shares that could be issued if all convertible securities (such as outstanding warrants) were exercised.

A key difference between fully diluted shares and shares issued and outstanding is that the total of fully diluted shares will include all the shares in the employee option pool that are reserved but not yet issued to employees.

important If you’re trying to figure out the likely percentage a number of shares will be worth in the future, it’s best to know the number of shares that are fully diluted.

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technical Even the fully diluted number may not take into account outstanding convertible securities (like convertible notes) that are waiting to be converted into stock at a future milestone. For a more complete understanding, in addition to asking about the fully-diluted capitalization you can ask about any convertible securities outstanding that are not included in that number.

confusion The terminology mentioned here isn’t universally applied. It’s worth discussing these terms with your company to be sure you’re on the same page.

Definition A capitalization table (cap table) is a table (often a spreadsheet or other official record) that records the ownership stakes, including number and class of shares, of all shareholders in the company. It is updated as stock is granted to new shareholders.*

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Classes of Stock

Definition Investors often ask for rights to be paid back first in exchange for their investment. The way these different rights are handled is by creating different classes of stock. (These are also sometimes called classes of shares, though that term has another meaning in the context of mutual funds.)

Definition Two important classes of stock are common stock and preferred stock. In general, preferred stock has “rights, preferences, and privileges” that common stock does not have. Typically, investors get preferred stock, and founders and employees get common stock (or stock options).

The exact number of classes of stock and the differences between them can vary company to company, and, in a startup, these can vary at each round of funding.

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Make sure your equity generates wealth, not a shocking tax bill.

Stock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for employees and managers.

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Length: 80 pages
Edition: e2.1.0
Last Updated: 2021-02-19
Language: English
ISBN (Holloway.com):
978-1-952120-03-9

Equity Compensation

by Joshua LevyJoe Wallin
Stock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for both employees and managers.

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