Equity Overhang Calculator
Calculate a company's Equity Overhang percentage, which represents the potential future dilution from outstanding equity awards and shares reserved for future issuance, relative to the currently outstanding shares.
Enter the **Currently Outstanding Shares** and the **Total Shares Subject to Potential Future Issuance** (sum of shares underlying outstanding grants and shares available in equity plans).
Enter Share Numbers
Understanding Equity Overhang
What is Equity Overhang?
Equity Overhang is a metric used primarily by investors, particularly venture capitalists and institutional investors, to understand the potential future dilution of existing shareholders. It represents the total number of shares that *could* be issued under a company's equity incentive plans, divided by the total number of shares currently outstanding.
It includes:
- Shares underlying **outstanding equity awards** (like stock options, restricted stock units - RSUs, etc., that haven't been exercised or settled yet).
- Shares **available for future grant** under approved equity plans.
A high equity overhang might signal significant potential future dilution, which could be a concern for current shareholders as it means their ownership percentage could decrease substantially as more shares are issued to employees, directors, or consultants.
How is Equity Overhang Calculated?
The basic formula is:
Equity Overhang (%) = (Total Shares Subject to Potential Future Issuance / Currently Outstanding Shares) * 100
Where "Total Shares Subject to Potential Future Issuance" is the sum of shares from outstanding grants and shares reserved for future grants.
Why is Equity Overhang Important?
Investors look at equity overhang to assess the potential impact of future equity compensation on the company's capitalization structure and earnings per share (EPS). While equity compensation is essential for attracting and retaining talent, a very large overhang can be perceived negatively as it represents a large pool of potential future stock issuances that could dilute existing ownership and shareholder value.
Equity Overhang Examples
Click on an example to see the calculation:
Example 1: Standard Calculation
Scenario: A tech startup is raising funds.
1. Known Values:
- Currently Outstanding Shares: 5,000,000
- Shares Underlying Outstanding Grants: 800,000
- Shares Available for Future Grant: 200,000
2. Calculate Total Potential Future Shares: 800,000 (Outstanding Grants) + 200,000 (Available for Future Grant) = 1,000,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (1,000,000 / 5,000,000) * 100 = 0.2 * 100 = 20%
Conclusion: The equity overhang is 20%.
Example 2: Company with No Unused Plan Shares
Scenario: A more mature private company has used up its current equity plan authorization but still has outstanding grants.
1. Known Values:
- Currently Outstanding Shares: 10,000,000
- Shares Underlying Outstanding Grants: 1,500,000
- Shares Available for Future Grant: 0
2. Calculate Total Potential Future Shares: 1,500,000 + 0 = 1,500,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (1,500,000 / 10,000,000) * 100 = 0.15 * 100 = 15%
Conclusion: The equity overhang is 15%.
Example 3: Pre-IPO Company with Large Reserve
Scenario: A company preparing for an IPO has a large pool of shares authorized for future grants to attract talent.
1. Known Values:
- Currently Outstanding Shares: 25,000,000
- Shares Underlying Outstanding Grants: 3,000,000
- Shares Available for Future Grant: 5,000,000
2. Calculate Total Potential Future Shares: 3,000,000 + 5,000,000 = 8,000,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (8,000,000 / 25,000,000) * 100 = 0.32 * 100 = 32%
Conclusion: The equity overhang is 32%.
Example 4: Low Overhang
Scenario: A stable, profitable company with limited recent equity issuance.
1. Known Values:
- Currently Outstanding Shares: 50,000,000
- Shares Underlying Outstanding Grants: 1,000,000
- Shares Available for Future Grant: 500,000
2. Calculate Total Potential Future Shares: 1,000,000 + 500,000 = 1,500,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (1,500,000 / 50,000,000) * 100 = 0.03 * 100 = 3%
Conclusion: The equity overhang is 3%.
Example 5: Company with Significant RSUs Outstanding
Scenario: A public company that primarily grants RSUs.
1. Known Values:
- Currently Outstanding Shares: 100,000,000
- Shares Underlying Outstanding RSUs (Potential Future Shares): 12,000,000
- Shares Available for Future Grant: 3,000,000
2. Calculate Total Potential Future Shares: 12,000,000 + 3,000,000 = 15,000,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (15,000,000 / 100,000,000) * 100 = 0.15 * 100 = 15%
Conclusion: The equity overhang is 15%.
Example 6: Early Stage Startup Planning for Equity
Scenario: A very early stage startup with a significant percentage of shares reserved for future employees.
1. Known Values:
- Currently Outstanding Shares: 2,000,000
- Shares Underlying Outstanding Grants: 100,000
- Shares Available for Future Grant: 500,000
2. Calculate Total Potential Future Shares: 100,000 + 500,000 = 600,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (600,000 / 2,000,000) * 100 = 0.30 * 100 = 30%
Conclusion: The equity overhang is 30%. Early stage companies often have higher overhangs.
Example 7: Calculating Before a New Plan is Approved
Scenario: A company needs to evaluate its current overhang before proposing a new equity plan.
1. Known Values:
- Currently Outstanding Shares: 75,000,000
- Shares Underlying Outstanding Grants: 8,000,000
- Shares Available for Future Grant: 500,000
2. Calculate Total Potential Future Shares: 8,000,000 + 500,000 = 8,500,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (8,500,000 / 75,000,000) * 100 ≈ 0.1133 * 100 ≈ 11.33%
Conclusion: The current equity overhang is about 11.33%.
Example 8: After a Large Grant or New Plan Authorization
Scenario: A company's board just approved a new 1,000,000 share pool for its equity plan.
1. Known Values:
- Currently Outstanding Shares: 60,000,000
- Shares Underlying Outstanding Grants: 6,000,000
- Shares Available for Future Grant (After New Plan): 1,500,000 (assuming 500k was there before)
Note: Here, the "Shares Subject to Potential Future Issuance" is the sum of existing outstanding grants AND the newly authorized available shares.
2. Calculate Total Potential Future Shares: 6,000,000 + 1,500,000 = 7,500,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (7,500,000 / 60,000,000) * 100 = 0.125 * 100 = 12.5%
Conclusion: The equity overhang is 12.5% after the new plan authorization.
Example 9: Small Private Company
Scenario: A small private company wants to understand its dilution potential.
1. Known Values:
- Currently Outstanding Shares: 1,000,000
- Shares Underlying Outstanding Grants: 150,000
- Shares Available for Future Grant: 100,000
2. Calculate Total Potential Future Shares: 150,000 + 100,000 = 250,000
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (250,000 / 1,000,000) * 100 = 0.25 * 100 = 25%
Conclusion: The equity overhang is 25%.
Example 10: Zero Overhang (Unlikely, but illustrates)
Scenario: A hypothetical company with no outstanding grants and no shares available for future grant.
1. Known Values:
- Currently Outstanding Shares: 5,000,000
- Shares Subject to Potential Future Issuance: 0
2. Calculate Total Potential Future Shares: 0
3. Formula: Overhang % = (Total Potential Future Shares / Currently Outstanding Shares) * 100
4. Calculation: Overhang % = (0 / 5,000,000) * 100 = 0%
Conclusion: The equity overhang is 0%.
Frequently Asked Questions about Equity Overhang
1. What does a high equity overhang mean?
A high equity overhang indicates that a significant percentage of shares could potentially be added to the outstanding share count in the future, primarily through employee equity compensation. This suggests a higher potential for future dilution of existing shareholders.
2. What is considered a "good" or "acceptable" equity overhang percentage?
There's no single "good" number, as it varies greatly by industry, company stage (e.g., startups vs. mature public companies), and growth strategy. Investors generally look for overhangs below a certain threshold (often cited ranges vary, but figures like 10-15% for mature companies or slightly higher for growth companies are sometimes referenced), but context is crucial. Very high percentages (e.g., >20-25% for established public companies) might raise concerns.
3. Does equity overhang include outstanding options?
Yes, equity overhang typically includes shares underlying outstanding, unexercised stock options, as these represent shares that *could* be issued in the future.
4. Does equity overhang include unvested RSUs?
Yes, shares underlying unvested Restricted Stock Units (RSUs) are also included, as they are expected to be issued as shares once they vest.
5. Does equity overhang include shares available for future grants?
Yes, shares that have been authorized by the board/shareholders for future issuance under equity plans but have not yet been granted are included in the calculation.
6. How is equity overhang different from burn rate or run rate?
Overhang is a snapshot of the *total pool* of potential future dilution from equity plans at a specific point in time. Burn rate (or run rate) measures the *rate* at which a company is granting equity awards annually, indicating how quickly the overhang pool is being used or how quickly new shares are being issued.
7. Why do companies have equity overhang?
Companies, especially in industries where talent is competitive (like tech), use equity compensation (options, RSUs, etc.) to attract, retain, and motivate employees, executives, and directors. Maintaining a pool of shares for future grants is necessary for ongoing hiring and compensation.
8. Can equity overhang change?
Yes. Overhang decreases as options/RSUs are exercised/vested and settled (reducing outstanding grants) or as shares available for future grant are issued. It increases when new shares are authorized for the equity plan or new grants are made from the available pool.
9. What are the inputs needed for this calculator?
You need the total number of currently outstanding shares and the total number of shares subject to potential future issuance. The latter figure is the sum of shares underlying outstanding equity awards (like unexercised options or unvested RSUs) and shares reserved but not yet granted under equity plans.
10. Can I use this calculator for any company?
Yes, this calculator performs the standard percentage calculation based on the two required inputs. However, finding the exact numbers for "Currently Outstanding Shares" and "Total Shares Subject to Potential Future Issuance" for a specific company requires access to their official financial reports (like SEC filings for public companies) or internal cap table data for private companies.
