What Is Fully Diluted Capitalization of a Company?

The capital structure of a company constitutes its financial make-up, including considerations such as shares of stock and debts such as loans and bonds. Various means of calculating and interpreting capital information exists, including the notion of fully diluted capitalization. This financial term relates directly to stock issuance and arises from the idea of fully diluted capital. As a method of calculating capital, it stands in opposition to the concept of issued and outstanding capital

Fully Diluted Capital

Fully diluted capital constitutes the sum total of all issued shares of common stock and options, as well as all common stock remaining in the options pool for a single company. All stocks reserved for employee options but not yet excised sit in the options pool. Some more complex fully diluted capital calculations include all preferred stock shares that will convert into common shares. Essentially, fully diluted capital equals the full potential number of issued shares of common stock at any given time.

Fully Diluted Capitalization

Fully diluted capitalization differs only slightly from the notion of fully diluted capital, from which it derives. The fully diluted capitalization of a company represents something of a theoretical eventuality, the terminal point at which all shares considered as fully diluted capital are owned. Thus while fully diluted capital simply counts all potentially outstanding common shares, fully diluted capitalization occurs when someone owns every single one of those shares, and all owned preferred shares convert into outstanding shares.

Issued and Outstanding Capital

Issued and outstanding capital equals the total number of issued shares of common and preferred stock, without considering any shares in the options pool. For instance, assume Company X issues 500,000 shares of common stock, 250,000 shares of preferred stock and maintains an options pool of 150,000 shares. The issued and outstanding capital in this case equals 750,000 shares (500,000+ 250,000), while the fully diluted capital equals 900,000 (,000+ 250,000 + 150,000) assuming all preferred shares can convert to common shares.

Authorized Shares

The notion of authorized shares constitutes the specter looming over issues of issued and outstanding capital and fully diluted capital. Authorized shares constitute the total number of shares a company authorizes for sale. For instance, Company Y may authorize 3 million shares but only actually issue 1 million. If Company Y reaches fully diluted capitalization, it can issue more shares for the options pool or for purchase by the general public to avoid a situation in which no unowned shares exist.

References

• A View From the Valley; Option Grants: Fully Diluted or Issues and Outstanding?; Matt Bartus
• “The Handbook of Financing Growth”; Kenneth H. Marks, et al.; 2009
• VC Ready Law Group: Legal Basics -- Fully Diluted Capital
• SocalTech.com; Venture Capital 101 for Startups -- Valuation; Samuel Wu; August 2009
• Wisconsin Department of Financial Institutions: Stocks