Advisors · Advisor Equity

What is the "normal" way to talk of % of ownership? % of issued shares or % of issuable share?

Dave R

October 13th, 2014

Previous discussions here suggest offering advisers something like 0.02 to 1.5 percent of equity in a company. And obviously, when it comes to investors, you face the question of what percent of the company for X number of dollars.

When I previously raised money for a startup, I was always very clear about explaining how many units the LLC was authorized to issue (10 million) and how many shares had been issued, and what the number of units being offered was in terms of all issued shares as well as all issuable shares.

In addition, until all shares are issued, the voting power based on issued share will be much greater than the percentage of ownership based on issuable shares.

But no one else seems to make this distinction when discussing giving so and so X% for their investment, or as an advisor, et cetera.

It seems to be an extremely important distinction to me. If issuable shares are never issued because the company becomes profitable without the need to sell or give away all those shares, then the percentage owned in real terms is much higher than the projected "worst case" percentage if every share is issued.

I'm guessing that "most people" must be privy to some convention I am too anally resistant to grasp (because in my mind, I always "insist" there are at least two ways to calculate percentage of ownership. The possible third and fourth ways being to project out how that ownership percentage will dilute if the company ends up authorizing the issuance of even more shares to raise more capital, either according to plan or contrary to plan, because things don't go right.)

So what do I need to understand to be sure I'm speaking and understanding the same percentage of equity language?

Scott Milburn Entrepreneurial Senior Executive and Attorney

October 13th, 2014

David, it is % of issued that matters. If you own 1M shares and an investor will get 500K shares, they will own 1/3 of the shares, and therefor 33% of the company. The fact that there may be another 850K shares that have been authorized is irrelevant - it is only the issued shares that vote, get dividends, and get paid upon a liquidity event. The only added factor beyond issued shares are the options, which are factored into a fully diluted number.

Shareholders authorize 10M or 100M shares just so they won't have to go through that exercise again, but the authorized but unissued shares have no real impact on anything.