The Issue - What It Means To Own "X% of the companies'
What does it mean that you have x% of a company?
Founder may confuse the subject. Why? There are at least three possible points of reference by the percentage ownership measure. It can be measured with respect to: (1) of the issued and outstanding shares (only the slimmest corporate action) or (2) of the issued and outstanding shares adjusted to reflect the maximum possible dilution through exercise ofStock options and other contingent interests outstanding in the company (using the "fully diluted" action), or (3) the authorized capital as a working model, if a company's Board of Directors believes shareholders will be at a later date (the measure working-class model).
In his own way, each of these measures can be lawfully used by founders in the discussion of percentage ownership in a company. Problems can arise, and not, though, when founders to discuss this issue and takeActions on it, without thinking about what reference point they use. Below I will describe the problems this creates, and note what you are looking to minimize potential problems in this important issue.
As the concept of "authorized shares" Means
When capitalized form a unit, it is. This implies that founders will receive cash or other assets to the company and is in return for a stake in a company. In a company that is owned by shares of establishedCamp. In an LLC, it will be through a membership interest, or perhaps evidence of such membership units of interest shows. Whether you receive shares or some form of property units, you are even a certain percentage of the company as a whole.
In different contexts, this question - "what percentage of the company itself, I can?" - Can be significant. Sometimes an important person is promised, x% of the company in exchange for some specific post. At the time of financing, are the founders declared that they wouldgive up x% of their company to VCs made in exchange for the dollar investment. If they take these matters into consideration, the founder must understand how to use this term to avoid misunderstandings and potential problems.
We can, how it works, explain, with either a company or an LLC. Leave us a public company to illustrate the points.
When a company formed, the charter document (Articles of Incorporation or Certificate) is the number of"authorized shares."
The concept of "authorized shares" is important in corporate law. A corporation is a legal person. As a legal entity, it acts through agents. There are shareholders who own the company. There are directors who sit as a board and do it at the highest level. And there are officers who conduct their day-to-day operations. Shareholders control the company through the control of the Board, which in turn, the most important decisions for theCompanies. Once in place by the shareholders of the Management Board is responsible for all the important decisions that are outside the ordinary course of the day to day operations of the company responsible. One of those decisions is whether the shares issued to different persons and under what conditions to do so.
All clear.
The shareholders board control.
The Board determines what has to issue and to whom and under what conditions.
But the Board must always act in the bestInterest of the company and its shareholders. Those who sit as directors on such a board, to exercise what the law calls a "duty of care 'the highest good faith and diligence to promote the interests of shareholders.
To protect shareholders, as the last owner of the company, which an outside company, what can the card has to do with the exhibition: the card can still vote to approve an inventory of the pool of shares from shareholders about tied " (orinitially by the incorporator) for this purpose. It can not exceed the bound. This rule protects the shareholders of a company from dilution of ownership interest beyond the borders they have admitted.
Let's recap us reflect.
The shareholders board control.
The Board determines what has to issue and to whom and under what conditions.
In the issue of shares, the Board ultimately in what they can by the number of shares that were previously restricted by the authorized editionShareholders for this purpose - that is, the governing board the power to issue shares will ultimately be limited by the number of authorized shares of the Company.
This is important. The concept of "legitimate" stock plays an important role in the common life by the shareholders a final word on the issues of ownership in the company. But (and this is a big but), unless used as a conceptual basis for a working model for the design than the shares authorized conceptnothing to do with what percentage of ownership interest each shareholder at a particular time.
Issued and outstanding shares as a strict corporate action
It is time for our first quiz.
They form a corporation and designated as the incorporator, 10 million as the number of authorized shares to all common shares.
Allow you to designate himself as sole director and as such, to 5 million shares, you spent as the sole shareholder. You pay for theShares and take the company to them working for you.
Thus, 10 million shares and 5 million authorized issued to you. What percentage of the company you own?
That's right, you own 100%.
It is not, "I have 5 million of the 10 million legitimate" and thus 50% of the company. Remember to have authorized shares nothing to do with actual ownership at some point in the history of the company. Only the shares issued are for this purpose.
So, you have 5 million sharesout of a total issued of 5 million and hence 100% of the company.
Let us extend the example. Say you have a co-founder who received 1 million shares at the same time as you got your 5 million.
What percent of the company do you own?
Now there are 6 million shares issued and outstanding. You own 5 million out of that total. Therefore, you own 5/6ths of the company, or approximately 83.3%. Your co-founder, in turn, owns 1 million out of the 6-million total, or 1/6th, or approximately 16.7%.
Even here there is nothing which is calculated with reference to the 10 million shares authorized to society. Technically it is wrong as a matter of corporate law, to say that you own 50% of the company in this example because you are approved for 5 million from its own 10 million shares, and it is equally wrong to say that you have a co-founder 10% owned by 1 million from 10 million were approved. However, people sometimes refer to the shares authorized as a basis forto say how much they themselves or others in a company and, if rightly considered, which has a certain logic. Let us consider how this comes.
A possible ambiguity of the use of a Working Model as a Point of Reference
Now let's extend the example further and assume that you're an important person who will join with you and your co-founders had been received 2% of your company to promise, if he is not this or that.
In technical terms, under company law, what is itYou promised when you make such a declaration? Well, there are 6 million shares issued, 5 a.m. to 1 p.m. to get you to your co-founder. If you have a 2% of 10 million shares authorized, your key person would receive about 200,000 shares. But 200,000 are issued in relation to the 6 million shares (plus 200,000) is a 2% stake, but about 3.2% (200,000 / 6,200,000). In technical terms, which would be 2% stake just over 120,000 shares (120,000 / 6,120,000 equates to approximately2%).
While this is technically accurate results, it is true that most parties, if it were, what would the discussion "2% of the Company" mean in the above example, probably think that the number 200,000. Why? Because they are sure there are a business, or at least one function not as a company for a startup company, is stagnant. It operates according to a working model.
In authorizing 10 million shares, you are probably on the assumption that the 10 million sharesare finally issued. One could even imagine something like this: OK, up to 6 million shares to the founders, 2 million for an equity pool issued to key personnel, and 2 million for future investors. Therefore, working on your model to interpret the proper way to "2% of the company" would be 200,000 shares, even if they were under strict rules of corporate law wrongly based.
In a sense, both views are right. Measure the 2% with reference to existing holdings and otherRelated to the expected share of the company.
Precisely for this reason that the founder put into trouble by promises such as "I give you 2% of the company," at least when they mean no light on what they do. Technically, under company law, this would mean little more than 120,000 shares in our example. But if the recipient says he understood it, when measured in terms of working model of the company, you have a problem and maybe even a claim on yourHands.
Issued and outstanding shares as measured on a fully diluted basis
Let us move another example to explain this further.
They have authorized 10 million shares, 4 million shares to founders, 2 million to investors who hold preferred shares can be converted to a common 1 to 1 ratio, a total of 1 million shares and options issued, none of which have not yet has been exercised. You are one of the founders and you have 1 million shares.
What percentage of theBusinesses do you own?
Well, you clearly have 6 million shares issued and outstanding (4 to founder, and 2) to investors. Does that mean you have 1 million from a total of 6 or 1/6th, or just a shade under 16.7%. The answer is yes and no.
Yes, have searched in the technical business terms. If your company has been acquired at this very moment, and nothing in the acquisition, has exercised the options and none of the options have been or could be after the deadline for the purchase, you exercisedthe proportion would be in exactly 1/6th of the total revenues. If the company for $ 6 million in cash, were acquired less the cost, you would get exactly 1 million U.S. dollars for your shares.
But no, not really. For while the precise about a picture of what may be presented in a certain moment of time are corporate happened, the options are in reality likely to be exercised over time and will be, or at least exercised in whole or in part. In fact, the purpose of issuing options isIncentives for key people. If she would not be exercised that the defeat of the point.
Therefore, you must (and all other options need to figure contingent equity rights, as in eg warrants) into the equation, what percentage of a company you really have to determine. The technical term for the inclusion of all these accounts is to say that you "own x% of a company on a fully diluted basis."
If we measure in our example search using the "fully diluted basis", then you would be 1 million from its owntotal of 7 million shares issued and outstanding, either randomly or in a position in the shares converted in the future. How would you own 1/7th of the company, or just a shade under 14.3%.
Does this mean that you could not actually get a higher percentage of an acquisition should be before all those options and other related interests occur were carried out all? Almost undoubtedly, you would get a higher percentage of participation, in most real situations.
Why?As a rule requiring options vesting and not all holders of options will vest in full. For example, some options are lost only to their owners and would be diluted by future calculations of the "full" capitalization of the company are deducted. Still other options are not connected to acceleration provisions with them and will not be transferred (and thus not exercisable) at the time of a takeover.
While the exact outcome is in transition, arises from the nature of the equityInterests in a dynamic start and not by the measure itself. Diluted measure is in fact the most accurate method for assessing one percent of the companies that you go to a certain point in time.
Let us recapitulate once more about the possible actions for the measurement of ownership of a company. Have in our first example above, we found that two clear points of reference, as a shareholder may be part of the company to create individual responsibility could be understood: its operations could be measuredwith reference to the issued and outstanding shares only, or it can be measured with reference to working model of the company. To this we must now add a third (the measure fully diluted) shares may, with respect to the total number of shares that are measured for options, and other contingent in circulation in a company under the assumption that all these conditional rights in shares been transformed.
As capital is in VC Funding Deals Measured and the potential for confusion byFounder
Now we want to go one step further, as VCs measure market capitalization at the time they see their investments.
VCs will usually take preference shares, but the kind of stock that they receive is not relevant for our example, if we assume that their preferred shares will ultimately be convertible into ordinary shares 1 for 1 (which) we accept.
Authorizes we go back to our example with 10 million shares. You are a founding member of Team Holding 4 million sharesoverall, they have created, you in trivial amounts at the time of incorporation. Now you can negotiate with VCs, a $ 6 million pre-money valuation for your business. They are willing to $ 4 million to invest in a series A round. If the pre-money valuation added, gives the company a value of "post-money of 10 million U.S. dollars. The VCS is $ 1 per share for their shares to pay on the basis of these ratings. You get 4 million shares for the 4 million U.S. dollars.
In this example, the founder of 4 haveMillion shares, the VCs have 4 million shares, the remaining 2 million shares from authorized as a whole are to be set aside for an equity pool of shares to be issued, the main human incentives.
Now it is the near-universal rule among start-ups to this scenario as one in which the founders ", get 40% of the company dealt with," the VCs, "he receives 40% of the company," and the remaining 20 % is reserved for the justice of incentives.
This type of evaluation is more accurate if we assume thatThe percentage calculations are calculated negotiated with respect to the working model between the founders and the VCs for this investment.
And of course there's nothing wrong with such an assessment. It is exactly what the parties had in mind when treating such. In fact, any such transaction is through an elaborate "cap-table", accompanied by the magic of the company's capitalization in intricate detail, factoring everything possible that could contribute to the ultimate dilutionof the shares.
But a lot of confusion out sensitive normally results from this method, and discuss.
Why? For in reality, under the Company's founding team that just given up this business, discussed 50% of the company, not the 40% of the VCs under the working title model.
If the control issues are dealt with, you will have in this case, a classic case of joint control, because each group is an identical interest, as in any situation, 50-50.
If,by some miracle the company to be acquired on the day after the Series A closing in this example, the VCs would receive 50% of net proceeds from the sale, not 40%.
If part of the negotiated terms included giving the VC the right to an outside CEO who would call received a large grant of shares as part of his compensation, which would transfer control immediately and decisively on the VC side. You do not have to shift a full 10%, as could the idea that they hold an implicit 40%Interest. You would have only the slightest change in a little more than 50% and thus keep control.
I did not raise these questions imply disloyalty on the part of VCs. The deals are structured so are legitimate. The parties know what they are doing, and negotiate with them, although only in a way that everyone is trying to achieve his goals. And these goals are not seen as contradictory at its core. All parties see the structure as one with whom they can work together totheir mutual benefit. The investors have the same right to protect their investments, which protect a company founder, their position. In reality, each side works cooperatively with the other while taking official steps taken to protect themselves from potential abuse. That makes sense and is a healthy outcome for all concerned. Issues such as control are often negotiated very detailed and there are often determined agreed terms of who will receive what board seats and the like.
What I mean to say herehowever, that the founder must be the full implications of what they do when they are not such offers, understand. In the example just cited, they are not to give up to 40% of their companies, but 50%. Yes, if it exhausts all of the pieces from the equity pool and ultimately will turn out by 40%, as each player is 50-50 on incremental 40% because the pool will be issued shares and converted into the herd thinned.
As a founding member, not by any means, such as quotations, if they meet your interests andto your company. To understand their impact. If you are still a ruthless VC firm under such an agreement, you are out in the cold, long before the equity is depleted pool and dilute your founding team of theoretical interest to 40%. Once the control is lost, also, any stock that you own lock-up period would likely be subject to forfeiture, when a coup took place and your service relationship with the company voluntarily stopped.
Are the deals but thenUnderstanding of the risks. A good VC firm will add value far beyond the investment. A bad can cause problems far beyond the dollar impact of its investment. If you guess about who owns what one percent of the company, and who can do what as a result of that ownership, you need to know what stocks are and the only part of a working model that does not count on the property under Corporate measured on the day of the VC round closes.
Conclusion
Wereviewed different scenarios of what it means to "own x% of the company." As you have seen, the expression can mean something different for everyone, the people, depending on whether it is measured is the actual shares, since these shares as a "fully diluted" or a working model that assumptions about the shares be spent making in the future. All are legitimate forms of measurement, depending on the situation. To make sure understanding that is used when you evaluate your own interestand interests granted by your company to major customers and investors. If you do not, you can get into trouble.
Of course, do not forget to check a good business attorney on all these issues. The decision is always yours, but you should do it with your eyes open. A good lawyer will help immeasurably over these issues. Do not neglect this resource.
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