📌 Educational Resource Disclaimer
This glossary provides general explanations of common equity terms. These definitions and examples are for educational purposes only and do not constitute legal, financial, or tax advice.
Equity structures vary significantly between companies, and your specific situation may have unique terms and conditions. For guidance on how these concepts apply to your individual situation, please consult with a qualified legal, financial, or tax professional.
Authorized Shares
The maximum number of shares a company is legally allowed to issue, as specified in a certificate of incorporation. Changes must have board and/or shareholder approval to increase this number.
Example:
Authorized shares: 15,000,000
Outstanding shares: 7,500,000
Reserved for option pool: 2,000,000
Available to issue: 5,500,000
Why it matters: If a company runs out of authorized shares, it can’t issue new equity without amending its certificate of incorporation (requires shareholder vote). Always maintain a buffer for future fundraising and employee grants.
Cap Table (Capitalization Table)
A comprehensive record of who owns what in a company, including founders, investors, employees, and advisors. The cap table tracks all securities (shares, options, warrants, convertible instruments) and shows ownership percentages.
Example:
Acme Inc. Cap Table
├── Common Stock
│ ├── Jane Doe (Founder): 4,000,000 shares (40%)
│ ├── John Smith (Founder): 3,000,000 shares (30%)
│ └── Employee Pool: 1,500,000 shares (15%)
├── Series A Preferred
│ └── Venture Fund LP: 1,500,000 shares (15%)
└── Convertible Instruments
└── SAFE Holders: $500K (converts later)
Total Outstanding: 10,000,000 shares
Why it matters: The cap table determines voting rights, economic returns, and dilution. Keeping it accurate is critical for fundraising, exits, and compliance.
Fully Diluted Shares
The total number of shares that would exist if all convertible securities (options, warrants, SAFEs, convertible notes) were converted or exercised today. This is the most comprehensive view of ownership.
Example:
Outstanding shares: 8,000,000
Unexercised options: 1,500,000
SAFE notes (if converted): 500,000
Fully diluted: 10,000,000 shares
Ownership percentage on a fully diluted basis is lower than on an outstanding basis.
Why it matters: Investors calculate their ownership on a fully diluted basis. When you tell an investor “you’ll own 20%,” they expect 20% of the fully diluted cap table.
Outstanding Shares
Shares that have actually been issued and are currently owned by shareholders. This does NOT include unexercised options, unvested shares, or convertible instruments that haven’t converted yet.
Example:
Founder shares: 7,000,000 (issued and owned)
Exercised employee options: 500,000 (issued and owned)
Unexercised options: 1,500,000 (NOT counted)
Outstanding shares: 7,500,000
Why it matters: This is the “real” current ownership before accounting for future dilution. Used for voting calculations and dividend distributions.
Par Value
The nominal value of a share as stated in a company’s certificate of incorporation. In most states, this is a minimal amount (often $0.0001 or $0.00001) and has no relation to the actual market value.
Example:
Par value: $0.0001 per share
Fair market value: $2.50 per share
Employee exercises 10,000 options: Pays $25,000 (10,000 × $2.50), not $1 (10,000 × $0.0001)
Why it matters: Par value affects franchise taxes in some states (Delaware). Setting it low minimizes these costs. Shares cannot be issued for less than par value.