Total shares: Overview, definition, and example
What are total shares?
Total shares refer to the total number of shares issued by a company, representing ownership in the company. These shares can be held by shareholders, which include investors, company founders, and employees. The total number of shares is significant because it determines the ownership structure of the company and is used to calculate important metrics, such as market capitalization and earnings per share (EPS).
Shares can be either authorized, issued, or outstanding. Authorized shares refer to the maximum number of shares a company is allowed to issue as specified in its corporate charter. Issued shares are those that the company has actually sold or distributed to shareholders. Outstanding shares refer to the number of shares currently held by shareholders, excluding those held in the company’s treasury.
Why are total shares important?
Total shares are important because they give a clear picture of the company’s capital structure and how ownership is distributed among shareholders. The total number of shares can affect various factors, including voting rights, control over the company, and the potential for dilution when new shares are issued.
For investors, understanding the total number of shares is essential for determining the value of their investment, as it impacts things like stock price, dividends, and ownership percentage. For businesses, managing the total number of shares is critical for maintaining the right balance of ownership and control.
Understanding total shares through an example
Let’s say you own a small company with 1,000 total shares authorized in your corporate charter. You decide to issue 500 shares to investors and retain the remaining 500 shares for yourself and the company’s employees. These 500 shares you hold, along with the 500 shares held by investors, represent the total shares of the company.
As the company grows, you may issue more shares in the future to raise capital, which will increase the total number of shares. If you issue an additional 500 shares, the total shares of the company would increase to 1,500, potentially diluting your ownership percentage if you do not purchase additional shares.
Example of a total shares clause
Here’s an example of how a total shares clause might appear in a corporate agreement or shareholder agreement:
“The Company is authorized to issue a total of [1,000,000] shares of common stock, of which [750,000] shares have been issued and are outstanding as of the effective date of this Agreement. The remaining authorized shares are available for issuance at the discretion of the Board of Directors, subject to the terms of this Agreement.”
Conclusion
Total shares are a key concept in understanding the ownership and financial structure of a company. By knowing the total number of shares, investors and company founders can assess ownership percentages, stock valuations, and the potential impact of issuing new shares. Whether you're an investor or a business owner, it’s essential to understand the implications of total shares on your stake in the company, voting rights, and overall financial health.
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.