Fully diluted shares

Shares of common stock and preferred stock are the two main types of equity compensation issued by private companies and startups. Generally, shares of common stock are issued to founders and employees, while shares of preferred stock are issued to investors. 

To describe a company’s stock, you may come across terms like “issued and outstanding shares,” “fully diluted shares,” or “ total “authorized shares.” These terms refer to different ways to scope the equity in your company.

What are fully diluted shares?

The fully diluted share count is the total common share equivalent (common stock, plus preferred stock calculated as if it was converted into common stock) of all equity that has been issued or is expected to be issued by a company.

A full dilution calculation includes outstanding shares plus potential shares from the conversion or exercise of convertible securities like employee stock options or warrants. The fully diluted count also includes the total number of shares in a company’s option pool. 

Fully diluted shares are an important metric to help you understand the value of your equity percentage and to calculate diluted earnings per share. There are several other ways to count equity, including the authorized share count or the number of outstanding shares. 

Fully diluted shares vs. authorized shares

The authorized share count is the maximum number of shares a company is legally allowed to issue, outlined by its incorporation documents. 

Fully diluted shares vs. outstanding shares

The outstanding share count is the amount of stock that has been issued and is currently held by shareholders. It does not include equity that is not yet converted or exercised into stock, such as warrants, options, restricted stock units (RSU), or stock appreciation rights (SAR). 

Typically, only outstanding stock has voting rights, while convertible securities that have not yet been converted or exercised do not. (However, this is dependent on each company’s specific incorporation document).

Earnings Per Share 

The distinction between outstanding shares and fully diluted shares is important when you are calculating earnings per share, an important metric for understanding the profitability of the company. 

Basic earnings per share is the net income of the company divided by outstanding shares, while diluted earnings per share is the net income divided by the fully diluted share count. 

How to calculate fully diluted shares 

You can calculate your fully diluted share count with the formula below: 

Fully Diluted Shares = Number of Common Shares Outstanding + Convertible Securities + Stock Options + Warrants + The Option Pool 

If your company uses Carta for equity management, you can view the fully diluted share count when viewing your cap table by share class. 

Share dilution and why “fully diluted shares” matter

Share dilution is the decrease in ownership percentage for existing shareholders when a company issues or reserves new shares of stock. Therefore, when an investor, founder, employee, or any other shareholder is trying to understand what percentage of ownership they own in a company, it is usually most accurate to think about that percentage on a fully diluted basis. 

For example, let’s say you use the fully diluted share count to calculate how much equity you own in your company. If you determine you own 1% of the company using full dilution, then that ownership percentage won’t change in the future—even as your co-workers exercise their options, or if a new hire is granted equity from the option pool. 

Alternatively, if you calculated your ownership percentage based on outstanding shares, such actions would dilute your percentage ownership.