Definition
A fully diluted capitalisation reflects not only the shares currently issued and outstanding, but also certain securities or rights that could result in additional shares.
Depending on the company's structure and the calculation being used, these can include:
Stock options
Warrants
Convertible securities
Other rights to acquire shares
Shares reserved for an employee option pool
The purpose is to show a more complete picture of potential ownership and dilution.
There is no single universal definition of "fully diluted". The securities included can depend on the transaction documents, applicable law, accounting treatment, and the specific calculation being performed.
Why does fully diluted matter?
A company's ownership can look different depending on whether you count only currently issued shares or also account for securities that could become shares.
For example:
Issued shares
Founder: 800,000
Investor: 200,000
Total:
1,000,000 shares
The investor owns:
200,000 ÷ 1,000,000 = 20%
Now suppose the company also has:
100,000 employee options
50,000 warrants
If these are included in the relevant fully diluted calculation:
Total = 1,150,000 shares
The investor's percentage becomes:
200,000 ÷ 1,150,000 ≈ 17.4%
The headline ownership therefore changes depending on the basis used.
Fully diluted vs. issued and outstanding
These are different measurements.
Issued and outstanding shares represent shares that have actually been issued and remain outstanding.
Fully diluted shares generally include additional potential shares from relevant equity-linked securities.
Issued & Outstanding | Fully Diluted | |
|---|---|---|
Existing shares | Included | Included |
Stock options | Usually excluded | May be included |
Warrants | Usually excluded | May be included |
Convertible securities | Usually excluded until conversion | May be included |
Option pool | Depending on structure | May be included |
The exact treatment must be defined for the particular transaction.
Fully diluted ownership
Fully diluted ownership answers a different question from simple current ownership.
For example:
Current ownership:
Founder owns 60% of currently outstanding shares.
Fully diluted ownership:
Founder owns 55% after taking relevant options and other potential shares into account.
The founder's actual current shares have not necessarily changed. The denominator used for the ownership calculation has changed.
Fully diluted cap table
A cap table can show both current and potential ownership.
For example:
Holder / Security | Current Shares | Potential Shares |
|---|---|---|
Founder | 600,000 | 600,000 |
Investor | 250,000 | 250,000 |
Employee options | 0 | 100,000 |
Warrants | 0 | 50,000 |
Total | 850,000 | 1,000,000 |
On a current-share basis, the founder owns:
600,000 ÷ 850,000 = 70.6%
On the illustrated fully diluted basis:
600,000 ÷ 1,000,000 = 60%
Fully diluted and employee option pools
Employee option pools are particularly important in startup financing.
Suppose a company has:
1 million existing shares
and creates a:
100,000-share option pool
The fully diluted share count may become:
1.1 million
The pool therefore represents approximately:
100,000 ÷ 1,100,000 = 9.1%
depending on the agreed capitalisation methodology.
This can materially affect founder and investor ownership.
Fully diluted and fundraising
Investors commonly examine fully diluted ownership when negotiating an equity financing.
Suppose an investor agrees to invest $5 million for 20% of a company on a specified fully diluted basis.
The parties need to establish exactly what securities are included in the denominator.
Otherwise, the headline 20% may not translate into the ownership percentage founders expect after the financing.
This is why financing documents typically define the relevant capitalisation carefully.
Fully diluted and dilution
Fully diluted calculations help founders model potential future dilution.
Suppose a founder currently owns:
70%
But the company has substantial outstanding options and convertible securities.
Once those securities are included, the founder's fully diluted ownership may be considerably lower.
Future financing can then cause additional dilution.
→ Dilution
Fully diluted and valuation
Fully diluted share counts are also important when calculating the implied price per share in a financing.
A simplified calculation is:
Price per Share = Relevant Pre-Money Valuation ÷ Fully Diluted Share Count
If:
Pre-money valuation = $10 million
Fully diluted share count = 2 million
then:
$10M ÷ 2M = $5 per share
If the fully diluted share count were instead 2.5 million, the implied price would be:
$10M ÷ 2.5M = $4 per share
The result therefore depends heavily on which securities are included.
Fully diluted and convertible securities
Convertible instruments can complicate fully diluted calculations.
A convertible note, for example, may eventually convert into shares according to terms involving:
Valuation caps
Discounts
Interest
Conversion prices
Qualified financing conditions
Whether and how such instruments are included in a fully diluted calculation depends on the relevant transaction terms and agreed definition.
A founder should therefore avoid assuming that every convertible instrument is treated identically.
Why investors care
Investors use fully diluted calculations to understand their potential ownership relative to all relevant existing and potential equity.
This helps them assess:
Ownership percentage
Dilution
Price per share
Option pools
Convertible securities
Future capitalisation
It also helps investors compare the economics of different financing proposals.
Example
A startup has:
700,000 founder shares
200,000 investor shares
100,000 employee options
50,000 warrants
If all are included in the relevant fully diluted calculation:
Total = 1,050,000
The founder's fully diluted ownership is:
700,000 ÷ 1,050,000 ≈ 66.7%
The founder still owns 700,000 actual shares. The 66.7% figure reflects the broader ownership denominator.
Common misconception
Fully diluted means every possible future share is included.
No.
"Fully diluted" does not necessarily mean every hypothetical future issuance.
It generally refers to the securities and potential shares included under the specific definition being used.
A financing agreement may define fully diluted capitalisation differently from another transaction.
Always check the underlying definition rather than relying solely on the label.
