Stock is an ownership interest in a company represented by shares. The important number is usually your percentage ownership, not merely how many shares you hold. section 20.2.1 section 21.4.2
Here is the uncomfortable startup lesson: owning the same number of shares does not guarantee keeping the same percentage. When a company creates new shares for investors, existing shares represent a smaller ownership stake. That reduction is dilution. section 20.2.1 section 20.2
A dilution calculation
Suppose you own 1,000 shares in a company with 1,000,000 shares outstanding: a 0.1% stake. If the company creates 500,000 new shares and you receive none, your percentage ownership falls by a factor of 1.5. That sounds bad, but the value of your stock can still rise if the company’s valuation and share price increase. Dilution matters most when the company has a flat or down round. section 20.2.1 section 20.2
When stock appears in an employee offer, check:
- Percentage ownership, because a raw option count means little without the total shares outstanding. section 21.4.2
- The vesting schedule, expiration date, strike price, and protections connected to a change of control or future financing. section 21.4.2
- The difference between an option and stock: an option is a right to purchase stock later at the strike price; exercising turns it into a share. section 21.4.2
