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R. Klein, EA
R. Klein, EA, Accountant
Category: Finance
Satisfied Customers: 2882
Experience:  Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
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Getting options in a startup and need to know the true percentage

Customer Question

Getting options in a startup and need to know the true percentage I'm getting of the company
Submitted: 1 year ago.
Category: Finance
Expert:  R. Klein, EA replied 1 year ago.

fastfile :

Thank you for your question.

fastfile :

Unfortunately., you have not given enough information to provide an accurate answer. In order to determine the percentage of ownership, I would need to know the number of shares you are receiving and the total number of shares issued.

fastfile :

Keep in mind that the company, and particularly true with startups, will issue far less stock in the company than the board has authorized. Ownership often gets diluted as the company uses stock to raise more cash.

fastfile :

If the company issues you 1000 shares, and all other employees a total of 9000 more shares, you own 10% of the company. But next month, the company finds a financier who is willing to give a million dollars for 100,000 shares, your percentage of ownership drops to a fraction of 1%, but you still own the same number of shares.

Customer:

So today, if there are 13 million shares authorized, and they have offered me 1.5% of the company, is it 1.5% of the 13 million shares that I own?

fastfile :

Ownership of a company, in terms of percentage, for an employee or minority shareholder is usually not an important determining factor in the value of the shares ultimately. Most of us would be happy owning 20 or 30 shares of Berkshire Hathaway or having received 100 shares of Microsoft in its first year.

Customer:

I'm not worried about the value

Customer:

Just % ownership.

Customer:

and # XXXXX shares I get for that

fastfile :

If there are 13 million shares authorized and the company offers you 1,5% of the company, you might get 1500 shares or 15000 shares depending on the number of shares currently ISSUED.

fastfile :

The authorized number is XXXXX total the company can issue, but often has issued just a fraction of the shares.

Customer:

ok let me give you more specifics

fastfile :

In the future, the board can also authorize to raise the number of shares that COULD be issued.

fastfile :

YOu could own 1.5% on the day you get it, and the next day, the company sells 5 million more shares, diluting you down.

Customer:

13,100,000 authorized, 8,000,000 common, 2,65,346 preferred, and option pool of 2,000,000

Customer:

sorry, preferred is 2,065,346

fastfile :

But how many shares are ISSUED?

Customer:

Issued means how many people have bought/owned?

Customer:

ah, I see, the above numbers don't say that

Customer:

right

Customer:

We don't have that information at our fingertips

fastfile :

Issued means how many shares have been exchanged for cash or services so far to date? A company can authorize 13 million, but issue only 1000 if they want. The other 12.9 Million is kept in reserve for the company to use at it sees fit.

fastfile :

In this little example above, if you have 15 of the 1000 shares, you have 1.5 % of the company ownership, and therefore 1.5% of the profits

Customer:

Got it. So when they say, "you will get 1.5% of the company" what is the share type they are going to use to calculate that??

Customer:

Of course I want a number that is favorable

fastfile :

Doesn't matter if it is preferred or not. shares are shares. Preferred has premium rights.

Customer:

I must not be communicating this right to you

Customer:

We are getting common stock

Customer:

for the options

Customer:

how do they determine what the 1.5% of the company represents?

Customer:

How many shares?

fastfile :

that's a moving target!

fastfile :

An option grants one the right to X number of shares, not a percentage of the company, usually.

fastfile :

Every day the company can issue more shares. Yo uget diluted every day!

Customer:

right, x number of WHY TYPE of shares? (Outstanding, issues, authorized?)

Customer:

Right, I'm talking about TODAY

fastfile :

The option TELLS what type of shares. There is no "standard" rule

fastfile :

The number of shares in a company that are issued can fluctuate daily.

Customer:

All the option agreement says is common stock

fastfile :

An option cannot be based on a percentage...only an physical number....

Customer:

Let's put it this way - if they say, "you will get 1.5% of the company", how many shares would I get based on the information I provided above?

Customer:

TODAY

fastfile :

No clue.

fastfile :

Not enough information.

Customer:

8,000,000 common shares distributed to founders

Customer:

2,065,346 preferred shares sold

Customer:

option pool of common 2,000,000

fastfile :

We're getting closer. That means 5 million other shares can be issued.

Customer:

Unsold preferred 1,034,659

Customer:

How do you calculate the number of shares I will get - (today :-) )

fastfile :

There are 13MM shares common, 8 MM are issued. 2MM can be used for option recipients.... Preferred shares don't count against common stock limits

fastfile :

How many UNSOLD common shares?

Customer:

none

Customer:

It's not 13M common

Customer:

It's 10M

Customer:

no?

Customer:

13M is authorized

fastfile :

Well,, assuming that there are 13MM issued common shares, and 2,065,346 preferred shares in the float (those reserved for options are probably in the treasury) and ASSUMING the preferred shares are worth the same percentage of ownership as a common share, that means there are 15,065,346 shares of which 1.5% = 225.980 shares

Customer:

No

fastfile :

no, what?

Customer:

There are a TOTAL of 13,100,000 shares in the company

Customer:

common shares distributed - 8M (to founders)

Customer:

Preferred sold (2,65,346)

Customer:

option pool of common 2,000,000

fastfile :

You said above there are 13MM COMMON.

Customer:

Unsold preferred 1,034,659

fastfile :

Preferred shares are NOT part of the allocation of COMMON shares

Customer:

sorry preferred sold (2,065,346)

fastfile :

But they do represent an ownership stake

Customer:

I said 13,100,000 authorized in the charter

Customer:

Or is my authorized number wrong?

Customer:

I can tell you are getting frustrated

Customer:

sorry

fastfile :

How many shares are AUTHORIZED in TOTAL? How many of those shares are Common? How many preferred?

Customer:

I just said that

Customer:

13,100,000 are authorized in total

Customer:

8M common shares distributed to founders

Customer:

2,000,000 option pool of common

Customer:

preferred sold 2,065,346

fastfile :

OK, your share comes out of the option pool.

Customer:

Unsold preferred available - 1,034,659

Customer:

which adds up to 13M

Customer:

1.5% of the option pool is not 1.5% of the company

Customer:

"You will get 1.5% of the company"

Customer:

How do I interpret that

Customer:

Of course it comes out of the option pool

fastfile :

That means 12,065,341 are in the float

Customer:

I guess so, you tell me. How do you come up with that?

fastfile :

And 180980 = 1.5% of the existing company

fastfile :

13.1 MM minus unsold shares

Customer:

So that is the standard understanding of that

fastfile :

And if your shares are issued from the "option pool" shares, it does not dilute anybody.

Customer:

Got that

Customer:

ok

Customer:

so the standard understanding is my percentage is based on total authorized minus unsold shares

Customer:

They said you get 150k shares. I wonder how they came up with that number

Customer:

ah - they just calculated that based on the common?

Customer:

8M issued and 2M option pool

Customer:

So what is the argument we come back with to get our 180,980?

Customer:

Given up on me yet?

Customer:

Come on fastfile, we're almost there!

fastfile :

Preferred shares, the last time I checked, are included in ownership!

fastfile :

Sounds like you are having a disagreement as to what constitutes 1.5% of ownership

Customer:

And when was that, before or after the great depression? :-))

Customer:

Yes!

Customer:

That is it

Customer:

just kidding

Customer:

having fun

Customer:

Where can I get some documentation that stipulates this?

fastfile :

That's why options should ALWAYS be in number of shares (usually with a provision for splits) rather than "percentage of ownership"

Customer:

Is there a standard type of site?

Customer:

or place to look?

Customer:

Now I know the argument to make

Customer:

But need backup

fastfile :

Not that I am aware of. It's basic accounting. OK, Accounting 102

Customer:

hahahah!

fastfile :

Ownership = Equity

fastfile :

Equity = Shares of stock issued

Customer:

Ok, you've done great, thanks for your perserverance

Customer:

Ah!

fastfile :

Shares of stock includes ALL Classes.

Customer:

perfect

Customer:

Ok thx. Excellent reviews for you.

Customer:

Bye

fastfile :

Unless some shares have no share of profits!

fastfile :

OK good luck!

Customer:

wait

Customer:

you still there?

Customer:

one last question

Customer:

or clarification

R. Klein, EA, Accountant
Category: Finance
Satisfied Customers: 2882
Experience: Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
R. Klein, EA and 4 other Finance Specialists are ready to help you

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