How Startup Shares Work: Share Structure and Fully Diluted Ownership Explained

You just got an offer letter: 50,000 shares. Is that a lot? A little? Without understanding how startup shares work, you genuinely cannot tell. 50,000 shares out of 10,000,000 total is 0.5% ownership. 50,000 shares out of 100,000,000 total is 0.05% ownership, representing a tenfold difference in your slice of the company. The share count alone tells you nothing.

Now shift to the founder perspective. You signed your certificate of incorporation with 10,000,000 authorized shares. What does that actually mean for your ownership? You divided the shares between co-founders and set aside 20% for an option pool. Do you own 50% of the company, or 40%?

The answer depends on which share count you're looking at, and most people are looking at the wrong one.

How Shares Are Created

The Legal Foundation

When you incorporate, you file a Certificate of Incorporation that specifies the number of authorized shares. This number defines the legal ceiling. The company can't issue more shares than this number without amending the charter through a formal shareholder vote.

The standard authorization for early-stage startups is 10,000,000 shares of common stock. 10 million is a historical convention that provides easy math and enough granularity for fractional ownership without requiring frequent charter amendments. Some companies choose 15,000,000 or 20,000,000, especially if they plan for larger option pools or multiple funding rounds before a priced equity round. Others start with as few as 1,000,000 shares for simplicity, though this reduces granularity for fractional employee grants and may require a charter amendment to authorize more shares sooner than expected.

The number itself is arbitrary. A company with 10,000,000 shares at $0.001 per share represents exactly the same economic value as a company with 1,000 shares at $10 per share. How these shares are divided among stakeholders matters more than the absolute number of shares.

Each share also has a par value, typically $0.0001 per share. This is a nominal legal price with no relationship to economic value.

FounderCo: Two Co-Founders Incorporate

Meet FounderCo: a newly incorporated Delaware C-Corp. Two co-founders authorize 10,000,000 shares of common stock and split them like this:

• Founder A: 4,000,000 shares
• Founder B: 4,000,000 shares
• Option pool: 2,000,000 shares reserved for future employees

That accounts for all 10,000,000 authorized shares. Nothing left unallocated.

The Four Share Counts That Matter

Think of share counts as nested layers, each one building on the previous. Authorized shares (the legal ceiling) contain issued shares (shares assigned to someone). Issued shares contain outstanding shares (shares actively held by shareholders). And fully diluted shares expand beyond outstanding to include all potential shares from options, convertibles, and reserved pools.

These four counts are the foundation for every cap table conversation you'll have.

Authorized Shares

Authorized shares are the maximum number of shares the company can legally issue, as specified in the Certificate of Incorporation. For FounderCo, this is 10,000,000 shares.

This is a ceiling, not a target. The company isn't required to issue all authorized shares, but it can't issue more than this number without filing a charter amendment.

Issued and Outstanding Shares

Issued shares are shares that have been assigned to someone: founders, employees, investors. Outstanding shares are the subset of issued shares currently held by shareholders, excluding any treasury shares the company has repurchased. For most early-stage startups these two numbers are identical because treasury shares are rare before later funding stages. In our example, both issued and outstanding equal 8,000,000 shares.

This count excludes option pool reserves and any unissued authorized shares. Notably, stock options granted to employees aren't issued shares. Options are contracts giving the right to purchase shares at a set price, and the shares only become issued when the employee exercises (pays for) those options.

Fully Diluted Shares

Fully diluted shares include all potential shares if everything converts or exercises. In our example, that's 10,000,000 shares: the 8,000,000 outstanding plus the 2,000,000 reserved for the option pool.

Fully diluted shares include:

• All outstanding shares
• All reserved option pool shares (granted and ungranted)
• All SAFE conversion shares (as-converted)
• All convertible note conversion shares (as-converted)
• Any outstanding warrants

Fully diluted shares is the number that matters for ownership calculations. Investors, term sheets, and professional cap tables all use the fully diluted share count.

For FounderCo, the four counts compare like this:

Basic vs Fully Diluted: The Number That Actually Matters

Every investor, term sheet, and serious cap table uses fully diluted share counts. Using basic shares overstates your ownership and creates surprises at conversion events.

FounderCo After Raising a SAFE

FounderCo raises $500,000 on a SAFE with a $5,000,000 post-money valuation cap using the standard Y Combinator (YC) post-money SAFE template. The SAFE doesn't convert immediately (it converts at the next priced round) but we can calculate the as-converted ownership to understand the fully diluted impact.

The SAFE investor will own:

• SAFE Ownership % = $500,000 / $5,000,000 = 10%

To determine how many shares the SAFE will convert into, we need to solve for the post-conversion total shares. If the SAFE investor owns 10% of the fully diluted total, then:

• Post-Conversion Total Shares = 10,000,000 / (1 - 0.10) = 11,111,111

The SAFE converts into:

• SAFE Shares = 11,111,111 - 10,000,000 = 1,111,111 shares

Comparing the basic and fully diluted ownership percentages:

Each founder went from 50% ownership (basic, pre-SAFE) to 36% ownership (fully diluted, post-SAFE). The 14-percentage-point gap represents the difference between thinking you have majority control and realizing you don't. The SAFE hasn't even formally converted yet. This is the as-converted view: the ownership picture if all convertible instruments converted today. Every investor, lawyer, and potential acquirer uses this number.

For the full mechanics of how SAFEs convert, see our guide on how SAFEs convert. For convertible note conversion mechanics, see our guide on how convertible notes convert.

What does fully diluted include in practice? It includes all outstanding shares, all reserved option pool shares (granted and ungranted), all SAFE conversion shares (as-converted at the valuation cap), all convertible note conversion shares (as-converted at the cap or discount), and any outstanding warrants. Every potential claim on equity is included in the denominator.

How the Option Pool Fits Into the Share Structure

The employee stock option pool is a block of authorized shares set aside for future employee equity grants. This pool is a critical component of your share structure because it affects fully diluted ownership immediately, even before a single option is granted.

Standard option pool sizes range from 10% to 20% of fully diluted shares at formation, expanding to 15-20% at Series A and beyond. The exact size depends on your hiring plan, industry, and stage. A company expecting to hire aggressively before its next round should reserve a larger pool. A lean team may get by with 10-15%.

Pool shares count toward the fully diluted total even though no one "owns" them yet. This is why Founder A's ownership dropped from 50% (basic) to 40% (fully diluted) in our FounderCo example. The 2,000,000 reserved pool shares are included in the denominator for fully diluted ownership calculations.

The pool means something different to each person at the table:

• Founders: The pool dilutes you before a single option is granted. Those 2,000,000 reserved shares sit in the fully diluted denominator whether you hire aggressively or not.
• Employees: Your options come from this pool. A small pool means fewer grants to go around, or a pool expansion that dilutes everyone further.
• Investors: They want the pool created before they invest so future grants come from your ownership, not theirs.

Option Pool Expansion at Series A

When you raise a priced equity round (typically Series A), investors often require an option pool expansion as part of the term sheet. A Series A investor might require a 15-20% post-money option pool, meaning the pool should represent 15-20% of the fully diluted shares after the round closes.

If your current pool is only 10% of the fully diluted total, the company must reserve additional shares to expand it to 20%. No one gives up existing shares; the company authorizes and reserves new shares for the pool (from unissued authorized shares, or by filing a charter amendment if needed). But those new shares increase the fully diluted total, which reduces every existing shareholder's ownership percentage. This is the option pool shuffle.

Investors require the pool expansion to come from the pre-money capitalization. This means the new pool shares dilute existing shareholders (founders and any converted SAFE or note holders) but not the new investors. Investors calculate their ownership percentage after the pool is already expanded, so the dilution falls entirely on those who were there before.

For example, if FounderCo's pool is at 10% and Series A investors require a 20% post-money pool, the company must expand the pool before the investment closes. Because the new investment will dilute the pool too, FounderCo actually needs to overshoot, reserving more than 20% of the pre-money shares so that after the investor's dilution, the pool lands at exactly 20% post-money. The fully diluted share count increases, and founders, employees, and the SAFE investor see their ownership percentages decrease before the Series A investment even closes.

What Happens When You Run Out of Authorized Shares

FounderCo authorized 10,000,000 shares at incorporation. After the SAFE conversion, the fully diluted share count is 11,111,111 shares, 1,111,111 shares over the authorized limit. The company can't legally issue the SAFE conversion shares without increasing the authorized share count.

As you grant stock options, convert SAFEs, expand your option pool, and close funding rounds, you consume authorized shares steadily. When the sum of issued plus reserved plus anticipated SAFE conversion shares approaches the authorized limit, you hit the ceiling. Many founders don't realize this is happening until a lawyer reviews the cap table during Series A due diligence.

Filing a Charter Amendment

Increasing authorized shares requires a board resolution, a shareholder vote, filing an amended Certificate of Incorporation with the state, and waiting for approval. The process takes a few weeks and costs a few thousand dollars in legal and filing fees.

Why Share Counts Are Misleading

One of the most common mistakes in evaluating equity is focusing on the share count rather than what those shares represent. Shares are units of ownership, and their value depends on two things: what percentage of the fully diluted total they represent, and the company's valuation. Equity has real economic value. For instance, shares can be sold in secondary transactions, must be addressed when a co-founder departs, and ultimately convert to cash at an exit. But the number of shares alone tells you nothing about that value.

This is particularly important for employees evaluating startup offers. When startup shares are explained to candidates during the hiring process, the conversation often focuses on the share count rather than the ownership percentage. That focus is misleading. As a founder hiring new employees, it's your job to educate potential employees on the right terminology and be transparent about ownership. As a potential employee interviewing, you need to be familiar with the terminology so you can ask the right questions and evaluate what you're being offered.

Consider these two scenarios:

• Scenario A: You receive 50,000 shares in a company with a $10M valuation and 10,000,000 fully diluted shares. Your ownership is 50,000 / 10,000,000 = 0.5%. The implied value of your equity is 0.5% × $10M = $50,000.
• Scenario B: You receive 50,000 shares in a company with a $100M valuation and 100,000,000 fully diluted shares. Your ownership is 50,000 / 100,000,000 = 0.05%. The implied value of your equity is 0.05% × $100M = $50,000.

Same share count. Same dollar value. But a 10x difference in ownership percentage.

Focus on these metrics instead:

The number of shares you hold is never meaningful in isolation. Always ask: "What percentage of the fully diluted total does this represent?" and "What is the current valuation?"

Your ownership percentage today isn't your ownership percentage in two years. Future funding rounds, option pool expansions, and convertible instrument conversions will all increase the fully diluted share count, reducing your percentage even though your share count stays the same. As a future employee, during the interview process, ask about the company's fundraising timeline, how much of the option pool has already been granted, and whether a pool expansion is expected at the next round. These factors directly affect how much your equity will be diluted before you're fully vested.

Share Structure Health Check

Before your next funding event, run through this quick assessment to ensure your share structure is healthy for your stage.

If your authorized-vs-needed buffer is under 10%, file a charter amendment before it becomes urgent. Waiting until days before a funding close creates avoidable delays.

Option pools below 10% before Series A signal you'll need a significant expansion at your next priced round. Plan for this dilution in your fundraising models.

Pool utilization over 80% means you're running out of grants for new hires. This often triggers pool expansion discussions that compound with Series A dilution.

Combined founder ownership below 50% before a priced round limits your control and negotiating leverage. If you're below 50% before institutional investors arrive, you may struggle to maintain influence over major company decisions.

Multiple share classes before funding suggests complexity that can slow due diligence. Most early-stage startups have only common stock until a priced round introduces preferred stock. If you have multiple classes without a priced round, ask your lawyer whether simplifying the structure is advisable before you start fundraising.

Key Takeaways

1. Shares are created at incorporation. The authorized share count is a legal ceiling set in your charter. The 10,000,000 standard is arbitrary; what matters is how shares are allocated among founders, the option pool, and future investors.
2. Fully diluted is the only number that matters for ownership. Investors, term sheets, and cap tables all use fully diluted share counts. Using basic shares overstates your ownership and creates surprises at conversion.
3. The option pool dilutes you before a single option is granted. Pool shares count toward fully diluted totals immediately. Two equal co-founders with a 20% pool own 40% each, not 50%.
4. Share counts are misleading. 50,000 shares means nothing without the fully diluted total and the current valuation. Think in percentages.
5. Model your share structure before signing anything. Use a cap table calculator to project how SAFEs, notes, option pools, and priced rounds affect your fully diluted ownership. Running these scenarios before you sign avoids expensive surprises.

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Understanding your share structure is the foundation for every cap table decision you'll make. Get the fundamentals right, and every future fundraising conversation becomes clearer.