Equity Overhang Calculator





When a company issues stock options or has plans to issue shares to employees, it creates what’s known as equity overhang. This term refers to the potential dilution in ownership existing shareholders might face in the future. For investors, founders, and corporate executives, understanding equity overhang is critical to evaluating the company’s current and future ownership structure.

The Equity Overhang Calculator is a powerful tool that helps estimate how much of the company’s total equity is potentially reserved for future issuance. This includes unexercised stock options, outstanding convertible securities, and unallocated shares in an equity pool. By calculating equity overhang, you gain insight into dilution risk, investor control, and employee compensation strategy.

In this article, we’ll explore the concept of equity overhang, the calculator’s usage, its underlying formula, detailed examples, best practices, and frequently asked questions.


What is Equity Overhang?

Equity overhang is the percentage of a company’s total shares that are reserved for future issuance to employees or other stakeholders. These shares are typically set aside in the form of:

  • Stock option plans
  • Restricted stock units (RSUs)
  • Convertible notes or SAFE agreements
  • Unallocated equity pool

Equity overhang helps assess the potential dilution shareholders will face when all of these reserved shares are eventually issued.

A high equity overhang might be a red flag for investors because it suggests significant future dilution. On the other hand, it could indicate that the company is actively building a strong team by offering competitive equity compensation.


Formula for Calculating Equity Overhang

The general formula for equity overhang is:

Equity Overhang (%) = (Shares Reserved for Issuance / (Outstanding Shares + Shares Reserved)) × 100

Where:

  • Shares Reserved for Issuance includes all unexercised options, RSUs, convertible instruments, and unallocated option pool.
  • Outstanding Shares is the total number of currently issued and outstanding shares.

This formula gives you the percentage of total equity that is not yet issued but reserved, which represents future dilution.


How to Use the Equity Overhang Calculator

Using the calculator is straightforward and involves a few simple inputs:

Step 1: Enter Outstanding Shares

Provide the number of current outstanding shares of the company.

Step 2: Enter Shares Reserved for Issuance

Input the number of shares currently reserved in the option pool, RSUs, unexercised stock options, and convertible instruments.

Step 3: Click Calculate

The calculator uses the formula to compute equity overhang as a percentage.

Step 4: Analyze the Result

Interpret the result in the context of your ownership, fundraising plan, or stock option pool planning.


Example Calculation

Scenario: A startup has 1,000,000 shares outstanding. It has:

  • 150,000 stock options granted but unexercised
  • 50,000 unallocated option pool
  • 100,000 RSUs to be issued

Total Reserved Shares = 150,000 + 50,000 + 100,000 = 300,000

Using the formula:

Equity Overhang (%) = (300,000 / (1,000,000 + 300,000)) × 100
Equity Overhang = (300,000 / 1,300,000) × 100
Equity Overhang = 23.08%

Interpretation: About 23% of the company’s equity is reserved for future issuance, implying potential dilution for current shareholders.


Why Equity Overhang Matters

  • Investor Impact: Investors want to know how much of their equity might be diluted in the future.
  • Founder Control: Founders need to assess how their stake could change over time.
  • Compensation Strategy: Companies offering equity to employees need to budget their option pool carefully.
  • Valuation Models: Accurate models account for potential dilution via equity overhang.

Key Considerations

  • Overhang Thresholds: In early-stage startups, equity overhang between 10%–25% is common. Anything above 30% can raise investor concerns.
  • Employee Incentives: A healthy overhang can attract top talent without constant board approval for new shares.
  • Fundraising Impact: High overhang might affect valuation and investor sentiment during financing rounds.
  • Cap Table Transparency: Accurate calculation ensures the cap table reflects true ownership and risks.

When to Recalculate Equity Overhang

  • After each funding round
  • When adding or resizing the stock option pool
  • Before negotiating employee equity offers
  • Prior to board or investor presentations

20 Frequently Asked Questions (FAQs)

  1. What is equity overhang in simple terms?
    It’s the percentage of shares set aside to be issued in the future that may dilute current shareholders.
  2. Why should I care about equity overhang?
    Because it affects ownership, valuation, and investor returns.
  3. Is high equity overhang bad?
    Not necessarily, but very high overhang (>30%) can signal heavy future dilution.
  4. How is the equity overhang percentage calculated?
    Divide the shares reserved by the total of outstanding and reserved shares, then multiply by 100.
  5. What’s included in shares reserved?
    Stock options, RSUs, convertible securities, and unallocated equity pool shares.
  6. Are exercised stock options part of overhang?
    No. Only unexercised options are considered overhang.
  7. Does equity overhang change after fundraising?
    Yes, especially if a new option pool is created or existing shares are diluted.
  8. How does equity overhang affect valuation?
    Higher overhang may lower perceived ownership value and affect pre-money/post-money valuation.
  9. Should I disclose equity overhang in my pitch deck?
    Yes. It shows transparency and helps investors assess future dilution.
  10. What’s a good equity overhang percentage?
    10%–20% is considered healthy. Above 30% may raise concerns.
  11. Is equity overhang the same as dilution?
    No. Overhang indicates potential future dilution, not actual dilution yet.
  12. How can I reduce equity overhang?
    Avoid excessive option grants or resizing of the pool unless necessary.
  13. Does equity overhang affect all shareholders?
    Yes. When new shares are issued, all existing holders experience dilution.
  14. What’s the difference between overhang and burn rate?
    Burn rate refers to how fast equity is used; overhang shows how much is reserved.
  15. Can convertible notes contribute to overhang?
    Yes, if they convert into equity in the future, they are included.
  16. How does an unallocated option pool affect overhang?
    It increases overhang even if options are not yet granted.
  17. Is overhang visible on the cap table?
    It should be. Cap tables must reflect reserved shares for accurate planning.
  18. What if overhang isn’t calculated?
    Investors may overestimate ownership and underestimate dilution risk.
  19. Do RSUs contribute to overhang?
    Yes, until they are issued, they are considered part of the reserved shares.
  20. Can equity overhang be too low?
    Yes. Too little reserved equity might hinder hiring and employee motivation.

Conclusion

The Equity Overhang Calculator is a crucial tool for founders, CFOs, HR professionals, and investors alike. It simplifies complex equity calculations and presents a clear picture of future ownership risks and responsibilities.

By understanding your equity overhang, you can plan compensation, manage investor relations, and make strategic fundraising decisions with full awareness of how ownership will evolve. Transparency, forward planning, and accurate modeling of equity overhang are keys to building trust and long-term value in any growing organization.

Leave a Comment