editione2.1.1
Updated September 12, 2022There are some key subtleties youβre likely to come across in the way outstanding shares are counted:
βDefinitionβ 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 doesnβt mean anything to the company or to shareholders: no one owns it.
βconfusionβ 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.
βconfusionβ 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.
βDefinitionβ 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.
βDefinitionβ 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.
βimportantβ If youβre trying to figure out the likely percentage a number of shares will be worth in the future, itβs best to know the number of shares that are fully diluted.
βtechnicalβ 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.
βconfusionβ The terminology mentioned here isnβt universally applied. Itβs worth discussing these terms with your company to be sure youβre on the same page.
βDefinitionβ 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.*
βDefinitionβ 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.)
βDefinitionβ Two important classes of stock are common stock and preferred stock. In general, preferred stock has βrights, preferences, and privilegesβ 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.