Fully diluted shares count everything: issued common and preferred stock, plus all shares that *would* exist if every stock option, warrant, SAFE, convertible note, and unallocated option-pool share were exercised and converted. It is the denominator that matters, because it answers the only question an ownership percentage is for — what fraction of the pie do you really own?
Issued vs fully diluted: a working example
A startup has 8,000,000 issued shares. It also has 1,200,000 options granted to employees, an 800,000-share unallocated option pool, and warrants for 100,000 shares held by a venture lender. Issued shares say the founder's 4,000,000 shares are 50% of the company. Fully diluted — 10,100,000 shares — they are 39.6%. The second number is the honest one.
Where the definition gets negotiated
"Fully diluted" sounds objective but has edges that move real money in a term sheet:
- The option pool shuffle — investors habitually require the post-round option pool to be created *pre-money*, which pushes the dilution entirely onto existing holders. A "$12M pre-money" offer with a 15% pool expansion is materially lower than the same number with the pool carved out post-money.
- SAFEs and notes — whether outstanding convertibles count in the pre-money share count changes the conversion math for everyone; modern SAFEs (post-money form) define this explicitly.
- Out-of-the-money warrants — usually included regardless of strike price, on the theory that dilution risk exists whether or not exercise is currently rational.
Practical rules
Founders should track their cap table on a fully diluted basis from day one, quote ownership to employees in fully diluted percentages (or better, in shares plus the current total), and read every valuation in a term sheet twice: once for the headline number, once for the share count it divides by.