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How to calculate issued and outstanding shares, and why it’s important

By Liana Minassian and Dan Offner

StartupProgram.com

You may be thinking to yourself – why do I care about learning how to calculate issued and outstanding shares; I know how many shares I own, isn’t that enough? While knowing how many shares you own is helpful, your company’s capitalization table (“cap table”) is critical when raising money and understanding exactly how equity is allocated.

Knowing how to calculate issued and outstanding shares is an important step in understanding your company’s current capitalization and can play a role in a number of situations you may encounter throughout the life of your company, including ownership analysis, venture capital investment, shareholder voting, and franchise taxes. 

This post will walk through how to calculate issued and outstanding shares, what is included and excluded from that calculation, and some reasons why it’s helpful to know the total number. But before diving into the math, it’s important to go through some of the relevant terminology to better understand what exactly is meant by “issued and outstanding shares.”

Authorized vs. Issued and Outstanding Shares

Authorized shares are the shares set forth in the company’s charter – it is the total amount of shares the company is allowed to issue. Issued and outstanding shares are the total number of shares that are already in the hands of founders, investors, and employees/advisors/contractors. While the number of issued and outstanding shares cannot exceed the number of authorized shares, the two values are not always equal because authorized shares may also include shares that the company reserves for future investors, employees, advisors, and the like.  

Typically, the issued and outstanding shares of a company are its capital stock, which is a combination of common stock and preferred stock. Each of these are further divided into subcategories based on different rights and preferences. Common stock is generally subdivided based on voting rights; for example, Class A common stock will have the right to vote, while Class B common stock will not. Preferred stock’s subdivisions are usually based on the various purchase prices, protective provisions, and other rights granted to the preferred stockholders.

Reserved Shares vs. Allocated Shares vs. Issued Shares       

Authorized shares fall into three categories: reserved, allocated, or issued. These distinctions play a role when determining whether a particular share is part of the issued and outstanding shares calculation.  

A simple way to think about the relationship between these categories is as a life cycle: 

Reserved Shares -> Allocated Shares -> Issued Shares 

If shares have been reserved through your company’s stock incentive plan (“SIP”) or a stock option pool, but not yet allocated to an individual, they are considered reserved shares

When these reserved shares have been assigned to employees, contractors, or advisors through a stock option or grant from the SIP, they are allocated shares. The shares will remain in this category so long as they are allocated to an individual but the option or grant remains unexercised, because these shares are not “issued” (and therefore not included in the calculation of issued and outstanding) until the holder exercises and pays for the option or grant. 

Issued shares are those that are purchased, granted, or issued in exchange for services, intellectual property, or cash. Shares can be in this category from the outset, such as when a founder or investor purchases the shares, or can follow the aforementioned life cycle, where the exercise and payment for allocated shares transforms them into issued shares. As indicated by the name, issued shares are included within the definition of issued and outstanding shares.

Convertible Promissory Notes, SAFEs, and Stock Warrants

If others have invested in your company through a convertible promissory note or a SAFE, the shares attributable to those instruments are not considered issued until they are converted or exercised. Stock warrants, like stock options and SIP grants, fall under a similar category – they are not included in the calculation until exercised.

Stock Buyback

Often, the number of issued shares is equal to the number of issued and outstanding shares. However, if the company has participated in a stock buyback, it has repurchased shares that were previously issued and outstanding, thereby reducing the number of outstanding shares.

How to Calculate Issued and Outstanding Shares

With issued and outstanding shares now defined, back to the main question of how to calculate the total number. When calculating issued and outstanding shares, the shareholder’s status (such as a founder, friends and family investor, employee, or venture capital firm) is not as important as whether those shares are actually applicable to the calculation. 

Simply put, the calculation is the total amount of issued capital stock (inclusive of common shares; preferred shares; any exercised stock options, SIP grants, and stock warrants; and any converted promissory notes and SAFEs), less any shares that have been repurchased by the company:

Total Capital Stock issued

Common stock issued (from our example above, this would be all issued Class A and Class B shares), including any exercised stock options, SIP grants, and stock warrants

+ Total preferred stock issued, including any converted/exercised promissory notes and SAFEs                                                       

= Total number of issued shares

–  Any shares repurchased by the company                         

= Total number of issued and outstanding shares

Why It’s Important to Know How Many Shares Are Issued and Outstanding

You’ve learned how to do the calculation. Here are a few reasons why knowing that number is important and helpful:

  1. It helps you (or any shareholder in your company) understand your current ownership percentage of the company at this specific moment in time. To determine this percentage, divide the number of issued shares you own by the total number of shares issued and outstanding. So, for example, if you own 500,000 shares of capital stock and the company has 5,000,000 shares issued and outstanding, you currently own 10% of the company. 
  2. If you plan on raising money from venture capital firms, the number of issued and outstanding shares will be a factor used in determining their investment. This value plays a part in the price per share they are willing to pay and, consequently, how many shares of your company they receive for their investment. Additionally, it may become important to some of the terms of their investment documents, such as the anti-dilution provision, since the calculation can depend on whether the formula calls for using the number of issued and outstanding shares or the fully diluted capitalization of the company (which can include, depending on the definition, the unexercised stock options, SIP grants, and stock warrants; SAFEs and convertible promissory notes converting in that financing; and/or any increases to the SIP or option pool).
  3. Knowing the total amount of issued and outstanding shares can help you determine how many shareholder votes are needed, per your company’s bylaws, for approvals of items put to a shareholder vote. Because certain common stock shareholders do not have voting rights (in our example above, the Class B common stock), this is typically limited to the election of the board of directors. However, some companies do not distinguish between voting and non-voting shares, in which case the total number of issued and outstanding shares is not only relevant to the amount of votes needed for all shareholder approvals, but also the amount of shareholders needed to constitute a quorum. 4.       And, lastly, one method used to calculate Delaware franchise taxes, the Assumed Par Value Capital Method, utilizes the number of issued shares (note from the calculation above that this number includes repurchased shares) when determining the amount of franchise taxes owed by the company.

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