This is the first post in a series about dilution. Before we start down that path though, lets start with some simple background information.
The key to understanding dilution comes with three simple words: Authorized, Issued, and Outstanding (shares).
Authorized Shares means the total (read, total ever) shares a Corporation can create or “cut itself into.” If you imagine a pizza, Authorized Shares are like the total number of slices the pizza will ever be cut up into. There is only ONE pizza, but the number of slices is up to you.
Issued Shares means the total number of shares that the Corporation has given out to Shareholders, plus what it has set aside for an employee stock option pool, plus the shares that it holds itself as treasury stock (fancy talk for Shares that the Corporation owns). Back to our pizza example: Issued Shares are like the total number of slices that the pizza is cut up into right now.
Outstanding Shares means the total number of shares that are actually owned by Shareholders (excluding treasury stock and stock option pool set aside). In pizza, the outstanding shares are like the number of slices that are currently claimed (MY PIZZA!) by your friends – specifically not including slices the host is keeping for himself (treasury stock) or slices the host is saving for future guests (stock option pool set aside).
In two weeks we will apply pizza to a real life dilution example. Happy Thanksgiving to you and your family.