What Do You Get with Startup Equity: A Comprehensive Guide
Startup equity is an essential aspect of any founder's or early-stage investor's journey. However, understanding what exactly an equity interest entails is crucial for making informed decisions. This article aims to demystify the concept of startup equity and provide a clear understanding of how it works in a corporate setting.
Understanding Authorized Shares and Issued Shares
When a corporation is formed, its certificate of incorporation or articles of incorporation specify a maximum number of shares that the company can issue. These are known as authorized shares. Until this number is changed through a certificate amendment process, it represents the total possible share quantity for the corporation.
In simple terms, if a company is authorized to issue 10 million shares and has issued 5 million, then there are 5 million shares available for future issuance.
The Role of the Board and Share Issuance
The board of directors authorizes the issuance of shares to shareholders in exchange for consideration, such as cash, property, or services. Once the consideration is provided, the shareholder receives issued shares. For example, if a company authorizes 5 million shares and issues 5 million, each shareholder who receives 5 shares will hold 5 of those 5 million issued shares.
Mathematically, if a company has 5 million issued shares and you hold 250,000 of those, your ownership percentage would be 5% ((250,000 / 5,000,000) * 100).
The Impact of Subsequent Issuances and Dilution
It is important to note that your initial shareholding percentage may change due to dilution. This occurs when new shares are issued to employees, investors, or other stakeholders. For instance, if a company issues an additional 2 million shares and you still hold 250,000, your ownership percentage would decrease to approximately 3.13% ((250,000 / 7,000,000) * 100).
Additional Considerations and Securities
The example provided above simplifies the scenario by assuming that the company only has one class of shares (common) and does not account for securities such as warrants or options. These additional instruments can further complicate the ownership structure, but they can also provide new opportunities for investors or employees.
For a more detailed understanding, see the complete guide on share ownership.
Disclaimer and Professional Advice
Please note that this article should not be considered a substitute for professional legal advice. It is provided for informational purposes only and does not establish an attorney-client relationship. If you have specific legal concerns or questions, it is essential to consult a licensed attorney in your jurisdiction.
For detailed guidance on how to calculate your share ownership percentage, see this comprehensive guide. If you believe you have a claim against someone, you should consult an attorney immediately to avoid missing any deadline for filing a claim.