Startup Law 101 Series – Mistakes Founders Make – Misunderstanding Capitalization.

 

The Issue – What It Means to Own “X% of the Company”

What the Concept of “Authorized Shares” Means

Issued and Outstanding Shares as the Strict Corporate Measure

A Potential Ambiguity from Using a Working Model as a Point of Reference

Issued and Outstanding Shares as Measured on a Fully-Diluted Basis

How Capitalization Is Measured in VC Funding Deals and the Potential for Confusion by Founders

Conclusion

We have reviewed various scenarios of what it means to “own x% of the company.” As you have seen, the phrase can mean different things to different people, depending on whether it is being measured by actual shares issued, by such shares when “fully diluted,” or by a working model that makes assumptions about what shares will be issued in the future. All are legitimate modes of measurement, depending on the situation. Just make sure you understand which is being used when you assess your own interest and the interests being granted by your company to key people and to investors. If you fail to do so, you may get into trouble.

Of course, don’t forget to check with a good business lawyer on all such issues. The decisions will always be yours but you should make them with open eyes. A good attorney will help immeasurably on such issues. Don’t neglect this resource.