When a company grants equity to employees or executives as a form of compensation, it does so at the expense of its shareholders. The more shares there are outstanding, the less the value of each share, which is known as dilution. A company's equity award burn rate is the rate at which the company grants awards of stock, whether through bonuses, options or outright grants.
1. Calculate the total number of shares the company awarded during the accounting period --typically one year -- from all sources, including options and grants. The source of the grant is immaterial.
2. Divide this number by the total number of shares outstanding at the beginning of the accounting period. For example, if a company has 100,000 shares in circulation at the beginning of the period, and issues a grant of 1,000 shares to a key executive, it has a equity award burn rate of 1 percent, or 1,000/100,000.
3. Calculate actual dilution. Dilution is the measure of a company's burn rate's actual effect on the value of existing shares. To do so, subtract the number of cancellations of equity awards from the total number of shares granted. Then divide the difference by the number of shares existing at the outset of the accounting period.