How many shares does a startup have? On the face of it, it seems fairly simple to count shares in a startup. But as with many things, once you dig deeper, you realize that the question really hinges on what definition you are using.
This article should help founders understand and calculate shares based on authorized, outstanding and a fully diluted basis. The method of calculation is particularly important if you are expressing an employee equity award in terms of percentage ownership which you should never do.
Authorized shares are the maximum number of shares a company can issue. When a startup incorporates as a corporation, it authorizes a certain number of shares in the certificate of incorporation. These authorized shares are the total amount of shares in the company. That number cannot be changed unless the certificate of incorporation is amended and re-filed in the state of incorporation.
The calculation for authorized shares is simple. Just look at the share count set forth in the certificate of incorporation.
Outstanding shares, sometimes referred to as issued and outstanding shares, are the total number of shares currently issued to shareholders. This number must be equal to or less than the total authorized shares.
To calculate the total outstanding shares, add together all the shares of every class of stock currently issued to shareholders. Do not include unexercised options or any other convertible security or warrant.
Note that it is very common for a company to have a certain amount of shares that are authorized but not issued. Those shares are held by the company and do not impact share calculation.
Fully diluted shares represent the total number of outstanding shares plus the total amount of shares if all possible securities were exercised or converted. This includes option pool, unexercised options, warrants and convertible securities such as Simple Agreement for Future Equity (SAFEs) and convertible notes. A fully diluted basis assumes the highest share count possible for a company.
To calculate shares on a fully diluted basis, add all the outstanding shares plus unexercised options, warrants, SAFEs and convertible notes.
Those are the three ways to calculate share count in a startup. If you need further guidance on this topic feel free to reach out to us here. Additionally, you may want to check out the amazing resources at Foresight.