Overhang is a concept used by investors and corporate managers to evaluate the potential dilution to common shareholder value due to the future grant of stock-based compensation. Generally speaking, it's a measure of the amount of equity that has been reserved for executive officers, employees, and directors’ stock options or other forms of incentive compensation for their services. Companies often reserve a certain percentage of their outstanding shares as equity for granting options. This is referred to as the “overhang amount.”

The formula to calculate the overhang percentage is: (Shares granted + outstanding options) / total shares outstanding. If a company has issued 1,000 shares and granted 3,000 options, its overhang would be 2,000/1,000 or 200%. An overhang of 200% means that two out of every three shares are reserved for granting options or restricted stock awards.

Having a significant overhang percentage can be viewed positively by shareholders and corporate directors. This means that the company is taking real steps to retain key employees, reward them for performance, and incentivize them to boost shareholder value. Large, successful companies often have high levels of overhang.

On the other hand, if the overhang percentage is too high, investors may be concerned about the potential for further dilution to their ownership stakes if the options are exercised. A high overhang percentage combined with a steady decline in the stock’s price can create a major problem for investors.

In either case, investors should evaluate the overhang percentage when considering investment opportunities. Understanding the potential impact of the overhang is an important component of making informed decisions. Overhang percentages should be evaluated in order to ensure that the company’s plans to issue options do not create additional risk to investors or shareholders.