How to read fully diluted shares and total outstanding stock in a cap table

Cap tables are complicated. We all know this. There are a thousand little things you need to know. So let’s deal with one (That’s a lie, there are a bunch!). Understanding fully diluted shares and total outstanding stock.

I’m going to try to make this as relatable and to the point as possible.

Stock vs shares

Let’s keep this simple. I intentionally wrote both stock and shares. There is no meaningful difference; it’s just syntax.

“Stock” describes the ownership certificates of any company, and “shares” refers to the ownership certificates of a particular company

Checkbox. They are the same thing. No more confusion.

Total outstanding shares

Outstanding shares are how many common and preference shares (as if converted) you have. It’s a pretty simple calculation.

Typically, founders have common and investors have preference shares. You add them all up and huzzah!

Total outstanding is how you get a C+ in your math test. You sort of passed, but you forgot about the other bits.

As if converted?

Gross, legal stuff. All this means is that preference shares ‘can’ convert into common. Investors have the ‘preference’ to decide. ‘As if converted’ assumes ‘all classes‘ of preferences actually do convert for the purposes of your calculation.

All classes?

Every time you raise money, you typically issue a ‘class’ of share. It’s like series a, b, c, d. It’s a legal classification. Each class might have different rights, so to track easier, you add a new bookshelf row for each investor. One row of books is a class of share. The bookshelf is your startup. The sum of books (shares) is who owns what.

What about issued and outstanding shares?

You probably hear about issued and outstanding interchangeably with ‘total outstanding shares’? Let’s sort this out.

They mean the same thing in the context of startup land.

In public company land, they are a bit different. Here’s how.

You authorise 1m shares (In Singapore and some other countries they don’t have this term). That’s what the law says you can give out max unless you pass a board resolution at a meeting, k. You can ‘issue’ up to 1m shares from the authorised 1m shares. Authorised is always > issued.

Now if you are a fancy big company you can have these things called ‘treasury shares’ (aka Reserve Shares) Basically, you buy shares from investors as a company and store them in your dungeon. You could cancel them, but you don’t. So they exist but are not used. You still need to count them for the issued calculation.

Outstanding shares are your issued + treasury shares.

Issued are outstanding – treasury shares.

Outstanding <= Issued <= Authorised

The difference between the ISSUED shares and the OUTSTANDING shares is the number of shares of TREASURY SHARES.

I don’t know why people say ‘issued and outstanding,’ they just do. For your purposes, they are the same thing. Outstanding makes sense (no treasury shares), so we use the term Total Outstanding.

Fully diluted shares

We want an A not a C+, right? So now we need the ‘other bits.’ Why?

You need to know fully diluted shares so you can calculate the true ownership % of stockholders. This is the shares they own divided by the fully diluted shares (Not outstanding).

Fully diluted shares are your outstanding (as above) AND your outstanding ‘options and warrants‘.

One definition of outstanding excludes preference shares; I ignore that as it doesn’t make sense in how you normally operate.

This calculation is more meaningful than using issued and outstanding common shares. Why? Because the fully diluted accounts for everyone’s claim. Using just common and preference shares are just part of the equation.

Options are basically your ESOP (How your staff get rich too).

Warrants are random things you don’t see very often. Short version- don’t accept them if you aren’t at a stage where you already understand them.

What about reserved options?

Now to get a bit more tricksy, fully diluted shares may (or may not) include shares ‘reserved’ in an ESOP that are not yet granted. If you have an ESOP of 10%, but have only granted 5%, there are 5% sitting around on the beach, waiting to be used. Depending on what you agreed, those shares may be deleted at an exit. So be clear on the definition.

What about convertible notes?

Smarty pants. They’re basically loans that could become shares. Since they are tied to a ‘qualified financing round‘ which is unknown, you treat them as a debt instrument till they actually convert. At your, say, series-a, they convert and get into your outstanding shares.

Qualified financing round

Basically your series-a/b/c. The normal criteria is a $ based amount of raising at least say, $500k. Whatever you defined it as.

Simply put, it means if you raise another cheeky $20k the convertible notes don’t convert.

What this looks like

Let’s look at a made up cap table now to understand this in practice. We will run through your common, series-A and series-B.

This example comes from the 50Folds Pro Cap Table.

Common

Your common sheet is who owns actual shares and has options and warrants at this stage.

You may have done a convertible fundraise already, but your angel investors who did a convertible note (“CN”) don’t actually own shares yet. They are not on the cap table.

You can see here that three people have common and 5 staff have options. There are no warrants.

When you see the Total Outstanding Stock column you can see the % only shows where there are Common shareholders. People with options are not shown.

Next, we see the Fully Diluted numbers and % and everyone is recognised. The Common owners have the same shares, but the total is larger.

The total outstanding stock is 205k.

The fully diluted number is larger at 250k. When you divide ownership by a larger number, the outcome will be smaller right? Look at my name “Alexander Jarvis.” I have 73.2% outstanding, but 60% diluted. When you include the 30k options, I actually own less if those options convert into shares.

Hm, there is a 15k difference between the subtotal and total shares?

There are 15k of ‘reserved options‘? Those reserved options are issued shares in the ESOP which have not been granted to staff yet. As we discussed above, you need to include all issued shares.

Series-A

Cool, we did our S-A. Yay! More investor cash and dilution…

We can see the cap table in the common is the same… but we have added more shareholders. We have added 4 new S-A owners and one warrant holder.

Anuj and Chirayu are actually convertible note holders from the seed round. They converted at the S-A qualified financing round and are now on the cap table.

Bessemer and A16Z are obviously the S-A investors. You see them in the S-A column.

Silicon Valley Bank has 10k in Warrants.

When we look at the total outstanding shares we see everyone other than the option and warrant holders. That adds up to 365,389 and 100% of the %.

The fully diluted adds up to 405,389, which is also 80% of the total (at the subtotal line).

The S-A investor required a 20% ESOP pool in the pre-money shares so we have 101,348 reserved options (The ESOP). This adds up to our total fully diluted of 506,737 shares. This is the number everyone’s actual ownership % is based on.

Series-B

We keep going and hit S-B.

Bessemer and A16Z both follow-on. SVB has not converted their warrants.

[Note: Mark Zuckerberg doesn’t actually join till series-G.. but the model checks for this and that accidental addition of his name (in the drop box menus in orange) means the model still works as it should (see he has no shares on the table).]

Alexander Jarvis now has 19.3% fully diluted. At series-A I had 29.6%. Dilution sucks.

The addition of the S-B investors means dilution for everyone. They are added to the total outstanding and the fully diluted total columns. You can see the % change for everyone.

Any questions? Hit me up in the comments. Don’t be a stranger now.

Want to learn more?

• Convertible note conversion math at Series-A. You don’t know how it really works!
• Key convertible note terms that no one understands and cost you big
• Seed round convertible, priced and SAFEs. What venture capital terms are standard?
• Understand how to read fully diluted shares and total outstanding stock in a cap table