What does “fully diluted” mean?
Generally, the statement refers to the complete ownership of all the issued and outstanding shares of common stock of a corporation taking into consideration the rights of holders of other classes to convert to common stock and the exercise of all common stock equivalents, like options.
For example, 100 shares of preferred stock that are convertible on a one-to-one ratio to common stock would be entered into a fully-diluted common stock table as 100 shares of common stock. If the company has granted options for 25 shares of common stock, these 25 shares would be included in a fully-diluted stock table, even if the vesting has not concluded and the holder has not yet exercised his or her right to purchase the underlying shares.
The consideration of all of these other forms of ownership plus the existing common stock ownership provide a more accurate picture of the ownership- if all of the various rights held by people having the right to common stock are considered.
Here is an example:
Founder 500 shares of Common Stock
Investor 50 shares of Preferred Stock (convertible to Common Stock at a ratio of 1:2)
Options Pool 50 shares of Common Stock
Fully-Diluted Ownership Table
Common Stock Ownership
Founder 500 shares 77%
Investor 100 shares 15%
Options 50 shares _______ 8%
TOTAL 650 shares 100%
Other derivations of this phrase exist, such as “fully diluted with a re-loaded option pool,” or “fully diluted including only issued options” so make certain you understand the exact intention of the parties when the phrase is used.
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