Fully diluted shares

What it means

The fully diluted share count is the total number of shares that would exist if everything capable of becoming a share had become one. It includes issued shares, every option granted, the whole of the option pool including the part nobody has been given yet, and every convertible instrument at its expected conversion. It is larger than the issued share count, usually by ten to twenty five percent at seed stage, and it is the basis on which almost every percentage in a term sheet is calculated.

Why it matters

Because a percentage means nothing until you know which denominator it uses, and the two denominators in common use differ by a lot. A founder who works out their stake against issued shares will get a number several points higher than the one an investor is working to, and both will be certain they are right. The fully diluted figure is the conservative one, so it is the one to quote about your own holding and the one to insist on when somebody quotes a stake to you. It is also the number that determines the price per share in a round, which is why a pool placed before the money moves it.

Worked example

A company has issued 9,500,000 shares: 7,000,000 to founders and 2,500,000 to a seed investor. It has an option pool of 1,500,000 shares of which 400,000 have been granted and 1,100,000 are unissued, and an outstanding convertible expected to convert into 1,000,000 shares. Issued shares are 9,500,000, so on that basis the founders hold 73.7 percent. Fully diluted the total is 12,000,000, and the founders hold 58.3 percent. Both figures are arithmetically correct and they differ by more than fifteen percentage points. A founder quoting the first one in a conversation where the investor means the second is having a different conversation from the one they think they are having.

The common mistake

Forgetting the ungranted part of the option pool. People remember the options that have been handed out and treat the rest of the pool as something that will only matter later, but the whole reserved block counts today because the whole block can be issued. The second mistake is leaving convertibles out on the grounds that nobody knows exactly what they will convert into. The number is uncertain, but modelling it as zero is not a way of handling that uncertainty, it is a guarantee of being wrong in a predictable direction. Both errors point the same way, which is towards a founder believing they hold more than they do.

In practice

Every term sheet percentage is fully diluted unless it says otherwise, and the definition will be spelled out in the document, so read the definition rather than assuming. Keep both figures in your cap table and label them, because both are needed: the issued count is what the share register says, and the fully diluted count is what every negotiation runs on. When somebody quotes you a stake without saying which basis they mean, the useful question is whether the pool and the convertibles are inside that number.

What to ask

Ask for the fully diluted share count and the definition being used, in writing, before you agree to any percentage. The definition is the part that varies: some include only granted options, some the whole pool, some every convertible at its expected conversion, and the same stake can be quoted several points apart depending on which. If you are an employee, ask for the fully diluted count and the total liquidation preference together, because your options cannot be valued without both and either one alone gives a misleadingly good answer. If a company will not give you the number, that is itself the answer to a different and more important question. Ask for the number as at today rather than as at the last round, because grants made since then have already moved it.

Related terms

• Option pool shuffle Placing the option pool before the money, so the founders fund all of it and the incoming investor funds none.
• Pre-money vs post-money SAFE Which of the two SAFE forms you signed decides whether your other convertibles dilute the investor or dilute you.
• Dead zone The band of exit values across which the common shareholders receive nothing extra, however much the price rises.