How to Calculate Ownership Percentage - Explained
Ownership of Company Shares
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Table of ContentsHow Can I Calculate My Share Ownership Percentage?Authorized, Issued, and Outstanding Shares, and Share EquivalentsAuthorized Shares Issued SharesShare EquivalentsShares OutstandingCalculating Share Ownership
How Can I Calculate My Share Ownership Percentage?
Employees and other shareholders receive shares for a number of reasons. This can be as compensation, as part of a stock split, as conversion of shares, pursuant to execution of stock options. Regardless of the reason for receiving shares, determining the value of shares received depends upon the number of shares outstanding and the value of the company. The value of the company is subject to any number of valuation methods employed by the evaluators.
In this article, we explain the process for determining an individual’s share ownership percentage.
Authorized, Issued, and Outstanding Shares, and Share Equivalents
Three concepts that are critical for calculating the percentage of company ownership include:
The articles of incorporation authorize the type and number of company shares. The number of authorized shares is the maximum number of shares that the company can issue to shareholders without going through the process of amending the articles of incorporation to authorize more. The board of directors and shareholders must vote to approve the authorization of new shares and restatement of the articles of incorporation. It is pretty common for a company to restate the articles of incorporation to authorize additional shares when necessary for an equity financing round. The company may increase the number of authorized shares of common stock or create new classes of preferred stock. The number of shares that a company authorizes is pretty arbitrary. It is an important consideration, however, as some jurisdiction charge franchise taxes based upon the number of shares authorized. Also, if a company has a certain capitalization, it may need issue a certain number of shares to create the desired value per share being issued.
This is the number of authorized shares that the company has issued to shareholders. This will include all common and preferred shares issued to founder, investors, employees, etc. Any time the company issues shares, it must be approved by the board of directors.
Companies often issue share equivalents to shareholders. Share equivalents include stock options, warrants, future stock purchase rights, or convertible instruments that can be converted into stock. Also, it is important to calculate shares outstanding as a common stock equivalent. A class of preferred shares may convert into a larger number of common shares. As such, you would calculate the common stock equivalency for purposes of determining the total number of shares issued.
Outstanding shares are the number of shares or share equivalents issued by the corporation minus any shares repurchased or reclaimed by the company. There are numerous reasons why a company may repurchase shares or reclaim shares. For example, the company may wish to buy out shareholders to increase the value of each share. Or, the company may repurchase shares pursuant to a right of first refusal or pursuant to the forfeiture of unvested shares issued as part of employee compensation.
Calculating Share Ownership
To calculate the percentage ownership of a shareholder, look first at the shares outstanding. It may be difficult to calculate this number, as it requires calculating share equivalents and unvested shares. Use this number as the denominator. As the numerator, determine the number of shares and share equivalents that the shareholder possesses. Now divide the numerator by the denominator. This will provide the shareholder’s ownership percentage. If an individual is entitled to an award, it is important to determine whether the individual is entitled to a percentage of outstanding shares or whether the individual is to be awarded shares that will make her a certain percentage owner after the issuance.
Let’s use an example to illustrate this calculation. Assume that a corporation authorizes 1 million shares at the time of restatement of the articles of incorporation. Immediately after the restatement, the founders receive 5 million of the shares. The founders hire an employee who receives stock as part of his compensation package. The first year, he will receive 2% of company ownership. The next four years, he will receive 1% of company ownership. The company also issued 500,000 stock options to other investors. The company also issued 100,000 preferred shares to early investors. The preferred shares have a conversion ratio of 1 preferred share to 10 common shares. How many shares should the employee receive during years 1 through 5?
First, let’s determine the total number of outstanding shares. Remember, this includes shares and share equivalents. This would be 5 million (founder shares) + 500K (stock options) + 1 million (100k preferred share x 10) = 6.5 million shares. The first year, issuing 2% of shares to the employee would mean issuing 65K shares. Next year would be 65,650 (6,565,000 x .01) shares, and so on.