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
Updated June 30, 2020:
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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FAQs
To calculate percentage ownership, take the number of shares you were offered and divide by the total number of fully diluted shares outstanding. You can find your equity information in your offer letter, or in the equity management platform your company uses (like Carta, for example).
How do you calculate percentage ownership of a company? ›
Note: The formula used to calculate Control Percentage = Voting shares of the parent/Total voting shares of subsidiary * 100 %. The formula used to calculate Ownership Percentage = Total shares of the parent/Total shares of subsidiary * 100 %.
How do you calculate how much you own of a company? ›
To calculate what percentage ownership you have in an equity investment, you would divided the # of shares acquired/purchased by the total # of shares outstanding. The resulting figure is expressed as a percentage and represents your % ownership.
What is an example of ownership percentage? ›
If, for instance, your business has 1,000 shares, ownership of 300 shares would equal 30% ownership. Your founders' agreement (which is usually part of the corporate bylaws) should clearly specify each owner's name, the total number of shares, and the shares owned by each owner.
How do you determine percentage of ownership in an LLC? ›
LLC ownership percentage is usually determined by how much equity each owner has contributed. The ownership interest given to each owner can depend on the need of the limited liability company and the rules of the state where the LLC has been formed.
What is the formula for percentage? ›
How Do We Find Percentage? The percentage can be found by dividing the value by the total value and then multiplying the result by 100. The formula used to calculate the percentage is: (value/total value)×100%.
What does 10% ownership of a company mean? ›
(B) 10-Percent shareholder The term “10-percent shareholder” means— (i) in the case of an obligation issued by a corporation, any person who owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote, or (ii) in the case of an obligation issued by a ...
How do you calculate indirect ownership percentage? ›
Indirect ownership shares are calculated by multiplying ownership shares along the chain going from the DI to the DIE. So, if A holds 60% of B and B holds 60% of C, A indirectly holds 36% of C.
What does owning 25% of a company mean? ›
(2) 25-percent owner The term “25-percent owner” means, with respect to any corporation, any person who owns at least 25 percent of— (A) the total voting power of all classes of stock of a corporation entitled to vote, or (B) the total value of all classes of stock of such corporation.
Is 1% equity in a startup good? ›
Up to this point, generally speaking, with teams of less than 12 people, the average granted equity for startup employees is 1%. This number can be as high as 2% for the first hires, and in some circ*mstances, the first hire(s) can be considered founders and their equity share could be even greater.
As such, 15-20% equity is usually a good number to offer an investor, depending on how much money they inject into the business.
What document shows percentage of ownership? ›
LLC Operating Agreement
The name and ownership percentage of each LLC member should be included in your operating agreement, and the document should be signed by all members. Since an operating agreement is legally binding, it can be used to prove ownership of your LLC.
What does 20% ownership of company mean? ›
20% Ownership means the ownership or holding, individually or jointly, directly or indirectly, through any Person of at least 20% of the capital stock or its equivalent in an Entity or of any right which such Person or Persons grants the authority to vote on 20% or more of the capital stock of an Entity.
How do you prove ownership of a company? ›
Businesses issue certificates to shareholders, members or partners in order to provide proof of ownership. This proof is typically provided in the form of a certificate: Stock certificates for corporations. Membership certificates for LLCs.
How do you divide ownership of an LLC? ›
Divide ownership of the LLC by calculating total cash investment by the members. Give each member an ownership stake equal to his cash investment. Four members contributing $25,000 apiece would each receive a 25 percent stake in the company.
How do you structure ownership of an LLC? ›
There are two common ownership structures for LLCs: a single-member LLC and a multi-member LLC. A single-member LLC is a limited liability company with a single business owner. Meanwhile, a multi-member LLC has multiple owners. And the operating agreement always dictates how to remove or add members down the road.
How to calculate partners ownership percentage and profits in business? ›
Calculating Partnership Profit Sharing Formula
Step 1: Determine the total profits of the partnership for a given period. Step 2: Subtract any expenses and liabilities from the total profits to arrive at the net profits. Step 3: Decide on a percentage or ratio for each partner's share of the profits.
What is the owner of 1% of a company entitled to? ›
If you own 1% of a company, you are technically entitled to 1% of the current value and future profits of that company. However, you cannot, as you seem to imply, just decide at some point to take your ball and go home.
