What does fully-diluted capitalization mean?
Takeaway: Fully-diluted capitalization is the most accurate depiction of the ownership of the company. It includes outstanding shares as well as things that can convert into outstanding shares like options and warrants. Some people also count shares issuable upon conversion of SAFEs and convertible notes if that number is calculable.
When discussing the valuation and ownership of a startup, the term "fully-diluted capitalization" comes up a lot.
Understanding Outstanding Capitalization
Outstanding capitalization refers to the total amount of equity that a company has issued and is outstanding, including common stock, preferred stock, and any other equity securities. Options and warrants are not technically outstanding shares - they are rights to acquire shares - so they are not included in the “outstanding capitalization.”
Fully-Diluted Capitalization
Fully-diluted capitalization refers to the total number of shares, warrants, and options (and sometimes includes other convertible securities like SAFEs and convertible notes). This means all outstanding shares of common and preferred stock, as well as all outstanding options and warrants. The fully-diluted capitalization is important because it provides a more accurate picture of the company's ownership and valuation than the outstanding capitalization.
Calculation of Fully-Diluted Capitalization
Calculating the fully-diluted capitalization requires careful consideration of all possible sources of conversion or exercise. This includes:
All outstanding shares of common and preferred stock
All outstanding options, including both vested and unvested options
All outstanding warrants and other convertible securities, such as SAFEs and convertible notes
The difference between outstanding capitalization and fully-diluted capitalization is that fully-diluted capitalization includes shares that have not yet been issued but that may be issued pursuant to convertible securities (e.g., options, warrants, SAFEs, convertible notes).
Conclusion
Fully-diluted capitalization is an important consideration for both founders and investors. For founders, it's important to understand the impact of dilution on their ownership. For investors, fully-diluted capitalization provides a more accurate picture of the company's valuation and potential return on investment. Calculating fully-diluted capitalization requires careful consideration of all possible sources of conversion or exercise.