Fully diluted share count

A fully diluted share count includes, in the denominator of the share total, not only shares already outstanding, but also those potentially issuable under an ESOP (employee stock ownership plan), a Phantom Stock Ownership Plan (PSOP), or convertible instruments such as Convertible bonds.

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This notion hides a real ambiguity: the option pool can be counted in full, or limited to options already granted to employees, or further restricted to only vested options as of the calculation date. Each of these conventions produces a meaningfully different value per share.

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The gap between these conventions can be significant: for a company with an unallocated ESOP pool equal to 10% of capital, including that pool in full versus excluding it from the denominator moves the value per share by several percentage points, a gap that flows straight through to the amount each founder or investor actually receives at exit.

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It is therefore advisable to negotiate explicitly a valuation expressed as Pre-money valuation fully diluted, specifying the convention used for the option pool, rather than leaving this assumption implicit in the term sheet, a frequent source of disagreement at closing in a financial structuring.