Number of shares issuable upon exercise: Overview, definition, and example
What is the number of shares issuable upon exercise?
The number of shares issuable upon exercise refers to the total number of shares a holder is entitled to receive when they exercise a stock option, warrant, or convertible security. This number is determined based on the terms of the agreement and may be subject to adjustments, vesting schedules, or dilution protections.
For example, if an employee holds stock options granting the right to purchase 1,000 shares at a fixed price, the number of shares issuable upon exercise is 1,000, assuming no adjustments have been made.
Why is the number of shares issuable upon exercise important?
This concept is important because it defines the exact number of shares an investor, employee, or other security holder can acquire, impacting ownership percentage, voting rights, and financial returns. It also ensures clarity in stock-based compensation plans, investment agreements, and merger transactions.
For businesses, accurately determining the number of shares issuable upon exercise helps manage dilution, maintain shareholder value, and comply with regulatory requirements. It is particularly relevant in equity financing, employee stock plans, and convertible debt agreements.
Understanding the number of shares issuable upon exercise through an example
Imagine a company grants an employee stock options for 5,000 shares, with a vesting period of four years. After two years, the employee has vested in 50% of their options, meaning they can exercise and receive 2,500 shares. The number of shares issuable upon exercise at that time would be 2,500, subject to any adjustments.
In another example, an investor holds a warrant allowing them to purchase 10,000 shares of a startup at $5 per share. If the company undergoes a stock split, doubling the number of shares but halving the price, the investor would now be entitled to 20,000 shares upon exercise at $2.50 per share.
An example of a number of shares issuable upon exercise clause
Here’s how a number of shares issuable upon exercise clause might appear in an investment agreement:
“Upon exercise of this Warrant, the Holder shall be entitled to receive [X] shares of Common Stock, subject to adjustments in accordance with the terms set forth in this Agreement.”
Conclusion
The number of shares issuable upon exercise determines how many shares an investor, employee, or holder of a convertible security is entitled to receive. It is a key factor in stock option plans, convertible securities, and equity financing transactions.
For businesses, carefully managing and disclosing the number of shares issuable upon exercise helps maintain shareholder confidence, prevent dilution issues, and ensure compliance with securities laws.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.