What does fully-diluted capitalization mean?
Takeaway: Fully-diluted capitalization is the most important number on your cap table—it includes every potential share of the company and serves as the denominator for calculating ownership percentages and setting the price in a financing.
When discussing equity with co-founders, employees, or investors, you will encounter the term fully-diluted capitalization (or “fully-diluted cap”). This isn’t just financial jargon—it’s essential to understanding your company’s true ownership structure. Any ownership percentage is meaningless unless you know the fully-diluted denominator.
“Fully diluted” means counting every share that could exist if all options, warrants, convertible securities, and reserved shares were issued. It’s the most comprehensive and conservative way to measure capitalization.
Components of a Fully-Diluted Cap Table
Issued and Outstanding Shares
All shares already issued to founders, employees, or other stockholders.
Equity Incentive Plan Pool
This includes:
Granted but unexercised options
Unallocated shares still available for future grants
Even though not all of these shares are issued, they represent future dilution and are always included.
Shares from Convertible or Other Securities
Any shares that could be issued if other instruments convert into stock, such as:
Warrants (rights to purchase stock)
Convertible notes or SAFEs (shares estimated based on conversion terms, often using the valuation cap)
Why “Fully Diluted” Is the Standard
Investors calculate ownership on a fully-diluted basis to see the real percentage they will own after accounting for all potential dilution.
Example:
8 million shares outstanding (all founder-held)
2 million shares reserved in the option pool
Fully-diluted cap = 10 million shares
Founder ownership = 8M ÷ 10M = 80% (not 100%)
In a financing, the price per share is calculated by dividing the pre-money valuation by the fully-diluted capitalization, typically adjusted for the agreed size of the option pool.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.