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Shares and Percentage Ownership | VC Lingo | SOSV - The Accelerator VC - YouTube
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Shares, shares. Oh, that sounds so nice.
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Shares.
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So what are shares and what
is percentage ownership?
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What's the difference between these
things and how do you even determine how
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many shares you have? Most people,
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when they are creating a company,
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they have to actually file and
say how many shares that exist.
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You can say you have a hundred
shares in your company.
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You can say you have a million shares,
you could say you have a billion shares,
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one BILLION shares in your company.
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But in fact there are reasons to
have a lower number of shares,
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like a million or a hundred
thousand or a thousand.
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In certain states they
charge you, as a filing fee,
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with that state by the number
of shares that you say you have.
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Other states,
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they charge based off of the par
value per share and other sorts of
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complications. If you're filing
as a Delaware corporation,
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you can easily file with a million shares
with a low par value and that ends up
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being just a nice easy way to
get started. 1 million shares,
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it could be 10 million shares.
It doesn't matter all that much.
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The reason why people like to
have a million shares for example,
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or two million shares is because they
like to have the dollar amounts that
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you're paying per share be, you know,
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a reasonable dollar amount level.
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You don't want to be paying 2 cents a
share because it makes your stock seem
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like it's pretty worthless. So you
could have a billion shares, right?
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And have it be worth two
tenths of a cent per share.
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And it's the same thing as having a
million shares and having it be worth - is
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that $2 a share?
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I think it's worth $2 a share versus
two tenths of a cent per share.
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So you would allocate the number
of shares in your company.
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And sometimes you'll actually say there
are allocated shares and issued shares.
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When you file with the state of Delaware,
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you may file that you have 5 million
shares allocated and 1 million shares
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issued. The only number of shares that
matter are the shares that are issued.
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And so all the percentages of the
company relate to the issued shares.
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And the shares that you issue are
sometimes issued view your stock option
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program.
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You may set aside at least 10% of your
company and your stock option program are
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15% of your company in your ESOP plan,
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a ESOP employee stock option program.
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And then you'll allocate the remainder
of the shares to all the founders
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initially. And a lot of the times
people will talk about percentage.
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So if you,
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if one founder gets 300,000 shares and
another founder gets 300,000 shares,
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a third founder gets 400,000 shares
of the original million shares,
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then there's 30, 30,
40% sort of breakdown.
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You add in the 15% dilution
for your ESOP plan.
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And all of a sudden it's one founder
getting 26 and a half percent,
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another founder getting 26 and a half
percent and the third founder getting 34%
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of the company. So that is you know,
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a little bit about what
number of shares, you know,
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it's a bit of a discussion about the
number of shares to have and to say and to
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issue. It doesn't matter to
anyone who's really knowledgeable.
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Like it doesn't matter to me as a venture
capitalist where whether I'm paying
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$200 a share or $2 a share.
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Obviously the percentage
matters more than anything else.
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But when you have staff,
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when you have employees and you say
we are going to give you two shares,
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you know, of the company,
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it may not be quite as moving to them as
if you say we're going to give you 2000
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shares or 20,000 shares. So
sometimes for psychological purposes,
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it will be very common for people to
have a larger number of shares that are
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allocated and issued.
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The reason to have more shares allocated
in your articles of incorporation with
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the state of Delaware, for
example, is so that you can,
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as a board of directors approve to issue
more shares without having to go file
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more
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paperwork with the government to
get that approved and pay more fees.
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So you'll allocate more
than you'll actually issue.
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And the board of directors can approve
the issuance of more shares as well as
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the allocation of more shares
to the ESOP pool, et cetera,
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on a new round of financing and with the
approval of any preferred shareholders
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who would normally be involved and
approving those new share issuances.
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So that's a lot of detail
about the various reasons
why people talk about shares
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and percentages of shares and the
number of shares that you may choose,
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which is fairly arbitrary.
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But there are reasons why people end up
going with a couple of million shares
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effectively that are being
allocated and issued for startups.
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That is shares and percentages.
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VC Lingo.
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