Meaning
The total number of shares that a company would have outstanding if all convertible securities were exercised defines the equity base of a startup. This metric, known as fully diluted capital, accounts for outstanding common stock, preferred shares, vested options, and unvested option pools. It represents the baseline for calculating price per share during new investment rounds, ensuring that no potential dilution is ignored.
Share Calculation
Investment agreements rely on precise equity counts to determine valuation. Calculating the fully diluted capital forces founders to include shares reserved for future employee grants. This inclusion lowers the effective share price before any money is invested, shifting the burden of the options pool onto the founders.
It ensures investors purchase their percentage based on the final, worst-case share count.
Financial Consequence
Capitalisation tables become complex as a company grows. A high share count under fully diluted capital reduces the individual payout for founders during an exit. Every option granted to a new hire dilutes the founding team rather than the preferred investors.
The attention required to manage this pool rises with each financing round.
Ownership Limit
Exit payouts are determined by the final share distribution. The fully diluted capital sets the ceiling for what founders can expect to earn. It establishes the absolute fractional ownership of each shareholder when the company is acquired.
