Make equity offers in exact share numbers, not percentages. “1% of the company” can mean 1% of authorized, outstanding or fully diluted shares, and the answer changes every time you raise money or grant equity. The two sides end up remembering different deals. State the number of shares, and put the same number in the offer letter and the board consent.
Key takeaways
- A percentage has at least three possible meanings, and it changes over time.
- The share count in the signed agreement controls.
- If you mention a percentage, tie it to a share count and a date.
Why do percentages cause problems?
James, the founder of Gregarious Games Inc., promises his first hire, Kiera, “1% of the company.” Gregarious Games has 10,000,000 authorized shares, 8,000,000 outstanding, and 9,000,000 fully diluted (8,000,000 outstanding plus a 1,000,000-share option pool).
- 1% of outstanding shares is 80,000.
- 1% of fully diluted shares is 90,000.
If the company later sells for $25 a share, that 10,000-share difference is worth $250,000. The date matters too, because share counts and the 409A price both change over time.
Companies are tempted to quote a percentage of outstanding shares because, for the same grant, it’s the bigger-sounding number. But the outstanding count grows with every issuance, so the next hire promised “1%” needs more shares than Kiera got, and employees who compare notes will notice the difference.
Fully diluted shares means issued and outstanding shares, plus the full option pool (granted and ungranted), plus warrants. See Startup Stocks: Authorized, Outstanding and Fully Diluted.
What should the offer letter say?
Subject to approval by the Board, you will be granted an option to purchase 90,000 shares of the Company’s common stock under the Company’s Equity Incentive Plan, at an exercise price equal to the fair market value on the grant date, vesting over four years with a one-year cliff. As of [date], this represents approximately 1% of the Company’s fully diluted shares.
What if someone insists on a percentage?
It’s a fair question. A share count means little without the total, so the cleanest answer is to give the candidate the fully diluted share count as of a date and let them do the math. If you do put a percentage in writing, tie it to a date and a share count: “1% of fully diluted shares as of [date].” Don’t promise a percentage that stays fixed after future financings. That requires an explicit top-up provision, which is rare and which investors dislike.
What if the agreement shows a different number than expected?
The share count in the signed agreement controls. A mismatch usually means someone calculated a percentage on a different basis or a different date.
Related: Promising vs Issuing Equity · Startup Stocks · Startup Equity Compensation
