“Fully diluted capitalization” refers to the total number of a company’s outstanding shares, options, warrants, and other convertible securities. This total is calculated as if all these securities were fully exercised or converted into the most basic unit of shares. For a Delaware corporation, this basic unit is usually the company’s common stock. The fully diluted capitalization is then expressed on an “as-converted to common stock” basis. Besides options and warrants, convertible securities can include convertible promissory notes, SAFEs, and convertible preferred stock.
The definition of fully diluted capitalization can change depending on the context. For instance, in startup fundraising, shares of common stock that are reserved but unissued under a company’s option pool are usually included in the fully diluted capitalization for price calculations, even though these shares are not outstanding or held by anyone. However, during a company’s sale or liquidation, these shares would be excluded from the fully diluted capitalization calculation used to allocate proceeds, as no one has a claim to these shares.
Understanding fully diluted capitalization and its components is crucial for founders and investors to comprehend their ownership and the potential impacts of transactions.