Fully Diluted Shares

Fully diluted shares refer to the total number of shares a company would have if all its outstanding convertible securities, such as convertible notes, stock options, and warrants, were exercised. This number is important because it provides a comprehensive view of a company's outstanding shares and their total potential dilution.

What Does Fully Diluted Share Mean?

Fully diluted shares represent a startup’s maximum number of shares. This number is important because it gives a more accurate representation of a company's outstanding shares and their potential for dilution, resulting from the issuance of new shares.

Fully Diluted Shares And Preferred Stock

Fully diluted shares take into account all outstanding equity, including the common and preferred stock.

Preferred stock is a type of security that has priority over common stock concerning preferred dividends and the distribution of assets in the event of a liquidation. It may also be convertible into shares of common stock in certain circumstances. 

Convertible preferred stock can be turned into a specified number of common shares at a predetermined conversion price, usually at the holder's discretion or under specific conditions agreed upon at the time of issuance.

How Do You Calculate Fully Diluted Shares?

To calculate fully diluted shares, you need to add the number of outstanding common shares to the number of convertible securities, such as stock options and warrants, that have the potential to be converted into common stock. The formula for fully diluted shares is as follows: Fully Diluted Shares = Outstanding Common Shares + Convertible Securities

For example, if a company has a million outstanding common shares and 500,000 stock options and warrants that could be converted into common stock, the fully diluted share count would be 1.5 million.

The fully diluted share count may change as a company issues new stock options and warrants or as existing options and warrants are exercised.

What Do Startups Use Fully Diluted Shares For?

Here are some ways startups and investors use the fully diluted share count:

• Startups also use the metric to plan stock option grants for employees and management, as it helps them understand the impact on their ownership and the potential dilution of their equity.
• Startups use the fully diluted share count to plan their financial future, including the issuance of new stock and the potential impact on earnings per share.
• Investors in startups use the fully diluted share count to make informed decisions about the company's overall value.
   

How Do Employee Stock Options Affect The Number Of Fully Diluted Shares?

Employee stock options can significantly impact the number of fully diluted shares. Stock options are a type of equity compensation that give employees the option to purchase company stock at a set price (or the exercise price).
When employees exercise their stock options, they convert them into actual shares of the company's stock. It’s important to note that the total number of shares does not change when employees exercise their stock options, it’s simply an accounting exercise: the pool of employee stock options is reduced and the number of outstanding shares is increased.

How Do Fully Diluted Shares Affect Earnings Per Share?

Fully diluted shares can significantly affect earnings per share (EPS), a key financial metric used to evaluate a company's profitability. EPS is calculated by dividing a company's net income by the number of outstanding shares.

The conversion of convertible securities or the exercise of employee stock options increases the number of outstanding shares. When this happens, the earnings pool is divided among a larger number of shares.

The net result is a decrease in EPS, even if the company's net income remains constant.

What Is The Difference Between Basic Shares And Fully Diluted Shares?

Basic and fully diluted shares are different ways of calculating the number of outstanding shares in a company.

Basic shares refer to the number of common shares currently outstanding and owned by shareholders. This does not include potential future stock issuances, such as employee stock options or convertible securities.

Fully diluted shares consider the impact of all outstanding convertible securities, including stock options and warrants. They reflect the total number of shares that could be outstanding if all convertible securities were exercised or converted into common stock.

What Are Outstanding Shares And Diluted Shares?

• Outstanding and diluted shares describe the number of shares of a company's stock that shareholders own.
• Outstanding shares refer to the number of shares of a company's stock that have been issued and are currently owned by shareholders. This includes common and preferred shares and does not consider any shares that may be held in the company's treasury.
• Diluted shares allow for the potential impact of all outstanding convertible securities, such as stock options and warrants. They reflect the total number of shares that could be outstanding if all convertible securities were exercised or converted into common stock.

Outstanding Shares Vs. Issued Shares

The difference between outstanding and issued shares is that issued shares include pending shares and any shares that have been repurchased by the company or held in the company's treasury. Outstanding shares represent only a portion of the total issued shares and provide a more accurate picture of a company's actual ownership structure and liquidity in the market.

What Is An Example Of Fully Diluted Shares?

Suppose a company, XYZ Inc., has 1 million common shares outstanding and 500,000 stock options that employees can exercise. The fully diluted share count for XYZ Inc. would be 1.5 million shares (1 million common shares + 500,000 stock options).

Now, let's assume that XYZ Inc. has a net income of $1 million for a given period. The company's earnings per share (EPS) based on the outstanding common shares would be $1 (1 million net income/1 million common shares).

However, if we considered the fully diluted shares, the EPS would be $0.67 (1 million net income/1.5 million fully diluted shares). This shows that even though the company's net income remains constant, the inclusion of the stock options in the calculation of fully diluted shares dilutes the relative value of each share and decreases the overall value of the company's earnings.

This example demonstrates how fully diluted shares can impact EPS and provide a more comprehensive picture of a company's profitability and potential dilution that may occur in the future.

Other Related Terms

Fully Diluted Capitalization

Fully diluted capitalization refers to the total value of a company's outstanding equity, including common shares and all convertible securities such as stock options, warrants, and convertible bonds.

Fully Diluted Equity

Fully diluted equity refers to the total value of a company's outstanding equity, including both common shares and all convertible securities such as stock options, warrants, and convertible bonds, as if they were all converted into common stock.

Fully Diluted Ownership

Fully diluted ownership refers to the total percentage ownership of a company, including both common shares and all convertible securities such as stock options, warrants, and convertible bonds, as if they were all converted into common stock.

Fully Diluted Market Cap

Fully diluted market capitalization, also known as fully diluted market cap, refers to the total value of a company if all outstanding convertible securities, such as stock options and warrants, were converted into common stock.

Vesting

Vesting is related to the concept of fully diluted shares in that it affects the number of shares included in the calculation of fully diluted shares. It refers to the process by which company employees or stakeholders earn the right to exercise their stock options or other equity-based compensation.