How to Determine Percentage of Ownership in a Company
Determining the percentage of ownership in a company is difficult. The percentage is calculated based on how much each owner has contributed to the company.3 min read
Understanding how to determine percentage of ownership in a company is very difficult. Generally, you would calculate this percentage based on how much each owner has contributed to the company. This can, however, be complicated depending on the needs of your company and the number of owners.
Establishing Ownership Percentage
The first thing you need to do when attempting to establish the ownership percentage of a company is to decide what amount of money you will need to start your business. Once you have this number, divide from the contribution you are making to the company to calculate your ownership positions. Having this number in place will be very useful when negotiating percentages with your potential partners.
Now, you will need to talk with your partners about the role you plan to take in the business. Your role within the company, including the amount of work you plan to contribute, is just as important in determining your ownership percentage as the money that you have contributed. Once you have completed negotiations with your partners, you should make your ownership percentage final. Be aware that this number represents both how much of the company you own and the amount of profits you receive, now and in the future.
If your business is a corporate entity, you will need to set up the worth of your company by establishing total shares. For instance, if your business has 10,000 shares, all of these shares would represent 100 percent of the ownership of your company. After establishing total shares, you will divide them among your partners by their ownership percentage.
Next, you need an agreement that includes all the important details of your business:
- Names of owners.
- Each person's ownership percentage.
- The total number of shares if applicable.
Once the agreement is in writing every owner should review it very carefully and then provide their signature. A notary should witness the signing of the agreement. Keep a copy of this agreement in your business records. It's also a good idea to copy the details of the agreement into your business plan. If your business is a corporate entity, you may need to submit a copy of this agreement to your Secretary of State.
Startup Company Ownership Percentage
When a startup company is first started, it's 100 percent owned by the company's founders.
When founders are able to use their initial profits to grow the company and find funding on their own, they will keep complete ownership of the company. Usually, however, startup founders require seed capital to start and expand the company, meaning they would have to give up some percentage of ownership.
If a startup uses outside funding, the founders will usually need either to pay interest on the funding or provide a financial stake to the person or entity who offered the funding. To make sure you keep as much control of your startup as possible, you should only accept outside funding that you absolutely need. For instance, if you give a 25 percent ownership stake in your company to outside investors, the founders of your startup would still have 75 percent ownership.
Typically, startups go through multiple rounds of funding, and with each successive round, the founder's ownership percentage shrinks. This process is known as dilution.
Depending on the number of funding rounds your startup undergoes, outside investors may end up owning more of the company than your founders. If this occurs, the investors can take control of your company, meaning they could fire you and the other founders and put themselves in charge. This means all the hard work you put into starting your company would be wasted.
To protect yourself from this situation, you can employ several methods.
- When starting your company, try to keep your costs as low as possible. Use technology to expand the reach of your company.
- Be sure that you never accept more funding than you need. Request only the amount that your startup absolutely has to have to avoid giving up too much ownership.
- Don't try to force your company to grow. Instead, let it expand organically, which will allow you to fund growth with profits and not outside financing.
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