Comments on: When Are 350 Million Shares No Different Than 35 Million?

By: EntreWorld Weblog

EntreWorld Weblog — Tue, 16 Aug 2005 01:04:00 +0000

What to Blog?

Today we had a great session with our "Entrepreneur Editorial Advisors" or EEAs, Sue Hesse, Gab Goncalves and Bill Payne. They have been working with us on our new website that we will be launching this fall on what the site should contain an…

By: Raj

Raj — Wed, 13 Jul 2005 19:26:08 +0000

Under assumed par value method, the key is the total gross assets and par value per share. So, if you are relatively early stage with relatively low number for both these variables – you can still bump up your shares outstanding without getting a big tax hit
Delaware provide a tax calculator at
http://www.state.de.us/corp/frtaxcalc.shtml

By: John Furrier

John Furrier — Sat, 02 Jul 2005 15:33:37 +0000

Brad and Dave: great resource. To me the biggest issue is the franchise tax.. getting whacked with the extra cost is the biggest downside. My last startup I got hit with the franchise tax bill and it hurt. Best to avoid it.

By: Todd Vernon

Todd Vernon — Thu, 30 Jun 2005 23:04:53 +0000

Excellent post. Basic rule of thumb (and brad points it out perfectly), avoid turning employee option grants into numbers that end in 667.. While it doesn’t matter, you give up a lot of good will explaining it. Next time around everyone gets 5 shares..

By: Dave Jilk

Dave Jilk — Thu, 30 Jun 2005 17:58:20 +0000

I take a different, and simpler perspective on this. In rational reality, above a certain minimum to avoid fractional shares, the share count is completely irrelevant so your only real objective is to minimize the franchise tax.

Psychologically, there are two main categories:

Executives. If they are experienced startup executives, they will understand the irrelevance of share count and will want to know the fully-diluted percentage of the company they are getting. If they’re very astute they will ask about the company’s expectations for future financing rounds and dilution. If they are NOT experienced at startups, and you explain how this works to them and they don’t get it, they probably don’t have the intellectual horsepower to be a startup executive.

Staffers. Most staffers care less about options than you would think, especially after the bust. To the extent you have fewer shares outstanding than other companies, a simple explanation to that effect will be good enough for most people (typical response: “Oh, ok. What are the health benefits again?”.

Occasionally you will run into an engineer who finds this very important but doesn’t understand it. Engineers are good at math: explain it.

And importantly, either actively or upon these discussions, provide a fully-diluted percentage number and tell candidates that they should be sure to obtain this from any other companies offering them a position. It’s the only objective number that means anything.

I continue to be amazed that so many people believe that a $20 stock is better than a $10 stock. How is it that so many people who participate in the stock market don’t understand the most fundamental principle of shareholding in a corporation?