How do you calculate a company's fully diluted value? (2024)

Calculating a company's fully diluted value involves considering all potential shares that could be outstanding, including not only currently issued shares but also potential future shares from options, convertible securities, and other instruments. Textbook formula is: Fully Diluted Value=Current Market Value of Equity+Convertible Securities+Options and Warrants+Restricted Stock Units (RSUs)Fully Diluted Value=Current Market Value of Equity+Convertible Securities+Options and Warrants+Restricted Stock Units (RSUs)Sometimes quite complex, if there are different classes of securities with varying conversion terms. It might be helpful to consult with financial experts or use specialized software for precise calculations.

In my experience, this is not so easy to calculate because it takes into account a couple of factors.The textbook formula for full dilution is:Fully Diluted Value = (Currently Outstanding Common Shares + Shares from Convertible Securities + Shares from Options and Warrants + Other Potentially Dilutive Instruments) x Current share price from last funding roundThe steps outlined in this article give a step by step formula how to do it, and the most important thing is when you actually calculate it, founders should have more than 30% of all the shares outstanding! If you have less you are in trouble for hostile takeover.

Look at Financial Statements:Check the company's most recent financial statements. The balance sheet or a specific section detailing equity may provide information on the total common shares outstanding.Explore Investor Relations Materials:Visit the company's investor relations website or contact their investor relations department. Often, companies provide key financial information, including the basic share count, in investor presentations or reports.Use Financial News Sources:Financial news platforms or databases may also report the basic share count for publicly traded companies. Websites like Yahoo Finance, Bloomberg, or Reuters typically include such information.

Identify the Size of the Option Pool:Review the company's stock option plan or equity incentive plan to determine the size of the existing option pool. This information is often disclosed in the company's SEC filings or equity-related documentation.Add Option Pool to Basic Share Count:Add the number of shares represented by the option pool to the basic share count. The formula for fully diluted shares is:Fully Diluted Shares=Basic Share Count+Number of Stock OptionsFully Diluted Shares=Basic Share Count+Number of Stock OptionsThis reflects the potential dilution from the existing option pool.

Identify Convertible Securities:Review the company's financial documents, funding history, or any outstanding convertible securities. Convertible notes, convertible preferred stock, or other convertible instruments may exist.Determine the Conversion Ratio:For each convertible security, determine the conversion ratio, which indicates how many common shares each unit of the convertible security can convert into.Calculate Potential Additional Shares:Multiply the number of outstanding convertible securities by their respective conversion ratios to calculate the potential additional shares upon conversion.

Once you have determined the fully diluted share count (from the previous steps), you can calculate the company's fully diluted value by dividing the overall valuation by the fully diluted share count. Here's the formula:Fully Diluted Value= Valuation/ Fully Diluted SharesThis step provides a per-share valuation that accounts for all potential sources of dilution, including outstanding options, warrants, and convertible securities. It gives a more comprehensive and accurate representation of the company's value on a fully diluted basis, reflecting the potential impact of all potential equity instruments.

The general accounting systems are based on historical data. Revaluation of intangible assets, IP's and discounted cashflow of disruptive innovation strategies can give a totally different breakdown of ownership.

Conversion Terms: Review the terms of any convertible securities (e.g., convertible notes) to ensure accurate conversion calculations.Option Exercise Prices: Confirm the exercise prices of stock options, as they impact the dilution effect when exercised.Outstanding Warrants: Include any outstanding warrants in the calculation, considering their potential conversion into common shares.Adjustments for Financing Rounds: If there are terms associated with specific financing rounds (e.g., anti-dilution provisions), ensure these are factored into the calculations.Employee Equity Plans: Take into account the existence of employee stock purchase plans or other equity incentive programs.