Counting Shares

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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 youโ€™re likely to come across in the way outstanding shares are counted:

โ€‹Definitionโ€‹ 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 doesnโ€™t mean anything to the company or to shareholders: no one owns it.

โ€‹confusionโ€‹ 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.

โ€‹confusionโ€‹ 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.

โ€‹Definitionโ€‹ 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.

โ€‹Definitionโ€‹ 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.

โ€‹importantโ€‹ If youโ€™re trying to figure out the likely percentage a number of shares will be worth in the future, itโ€™s best to know the number of shares that are fully diluted.

โ€‹technicalโ€‹ 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.

โ€‹confusionโ€‹ The terminology mentioned here isnโ€™t universally applied. Itโ€™s worth discussing these terms with your company to be sure youโ€™re on the same page.

โ€‹Definitionโ€‹ 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

โ€‹Definitionโ€‹ 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.)

โ€‹Definitionโ€‹ Two important classes of stock are common stock and preferred stock. In general, preferred stock has โ€œrights, preferences, and privilegesโ€ 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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