Tushit Pandey
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Editor's Note:- To help investors, employees, and founders better understand how equity truly changes, this article describes fully diluted shares.
Since every business has a unique structure, consider this instructional advice rather than seeking legal or financial advice. Prior to making any decisions, always confirm your actual cap table and conversion terms.
At first, discussions about equity may seem surprisingly straightforward. An early employee may believe that their stock grant equates to 1% ownership, or a founder may declare, "I own 50% of the company." However, those figures change as a business expands in terms of hiring, fundraising, and granting opportunities. If you're not paying attention, you might wake up one day and discover that your "percentage" was calculated completely incorrectly.
Understanding fully diluted shares becomes crucial at that point. When someone discusses percentages "on a fully diluted basis," they are providing you with the most accurate representation of the equity picture, not the most attractive one, but the one that genuinely endures over time.
Let's dissect this without using technical terms.
Basic shares refer to what’s issued and outstanding today.
Fully diluted shares refer to what would exist if every potential share became real.
Stock options , convertible notes, warrants, SAFEs, RSUs, and the unallocated portion of the employee option pool are all included in this. This type of ownership is known as "no hiding, no guessing."
When employees or investors request numbers "on a fully diluted basis," they are actually looking for clarity rather than optimistic percentages that will eventually decline.
Dilution is more than just a financial strategy. It's sentimental.
After converting SAFEs, growing the ESOP, and modeling the next round, I've seen founders who thought they owned 40% of their company turn out they only owned 25%. I've witnessed early employees receive equity offers that appeared fantastic in their offer letter, only to discover later that the percentage wasn't calculated using the fully diluted cap table.
This is also not uncommon. Actually:
Stat #1: Early employees often struggle to understand their real ownership
Very few employees know how options work, and most employees are unfamiliar with basic option concepts unless companies invest heavily in education.
Stat #2: Dilution accelerates during early funding rounds
According to research, before the business even reaches scale, founders lose between 20% and 25% of ownership during the seed and Series A phases alone.
Stat #3: Option pools significantly reduce ownership when not accounted for
Employee option pools generally account for 10%–20% of a startup's fully diluted capitalization, according to data from cap-table studies.
These are more than just figures. They serve as a reminder that dilution can subtly alter your financial future over time if it is ignored or misunderstood.
The math itself is not difficult. Recalling what to include is the difficult part.
This is the simple version:
Basic shares: 1,000,000
Unexercised options: 200,000
SAFEs that convert into: 300,000 shares
Option pool leftover: 100,000
Fully diluted shares = 1,600,000
If you own 400,000 shares, your:
The second number is the one that matters.
Optimism and presumptions are the main causes of equity confusion. People believe:
However, dilution is similar to gravity in that, unless you actively monitor it, it subtly tugs on everyone's ownership.
When raising money, founders sense it.
When their expected equity value declines, employees are affected.
When their share declines following option pool expansions, investors notice it.
Everyone is shielded from wishful thinking by fully diluted calculations.
Equity is more than just math; it's a symbol of sacrifice, hard work, and conviction. For equity, people stay late. People decline higher compensation for it. People who believe in upside join riskier startups.
Therefore, it is not "just business" when ownership changes due to concealed dilution. It can harm relationships between founders and early team members, as well as trust and morale.
Honesty is brought to the table when equity is discussed in a fully diluted manner. It clarifies hiring discussions. It facilitates transparency in fundraising. Long-term planning becomes more grounded as a result.
It puts an end to surprises. Additionally, people only put up with pleasant surprises.
The most accurate representation of your ownership is provided by fully diluted shares; this is the one that matters when everything converts, not the one at the top of the offer letter or the one from your seed round.
Founders and staff are shielded from misconceptions by knowing what fully diluted basis means, how to compute fully diluted shares, and how dilution changes over time. Speaking in fully diluted numbers helps you negotiate fairly, establish trust, and make more intelligent equity decisions.
Equity is a promise as well as a financial tool. You can be honest about that promise by using fully diluted shares.
Yes. It’s the only realistic way to understand what your equity will be worth after fundraising, option pool expansions, and conversions.
Yes. If they’re approved in the option pool, they count, even if no employee has received them yet.
Because they want clarity on long-term ownership and the true value of their percentage.
It can, especially during early years when startups grant options, raise rounds, or issue SAFEs.
Not exactly. EPS calculations sometimes exclude out-of-the-money options. But for startup ownership purposes, “fully diluted” typically means everything counted.
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