Fully Diluted Basis — What It Means and Why It Matters
Series 2 · Term Sheets, Deconstructed · Post 4 of 9 · 8 minutes
Fully Diluted Basis: What It Means and Why It Matters
In short. A term sheet prices a round on a fully diluted basis: a count of shares that treats every option and warrant as exercised, every SAFE and note as converted, and the option pool, topped up before the round, as if it were already granted. The term sheet defines the count, and every share in it lowers the price per share the investor pays. In the example below, founders who hold 75 per cent of the shares that exist hold 50 per cent of the shares the term sheet counts, and 40 per cent once a $2,000,000 round at an $8,000,000 pre-money valuation closes. The first move is a change in what is counted; the second is the round.
| The count | Shares | Founders |
|---|---|---|
| Issued sharesthe shares that exist today | 8,000,000 | 75.0% |
| Fully diluted, as the term sheet defines itplus 1,000,000 options granted, 1,000,000 unallocated pool (topped up from 400,000) and 2,000,000 assumed SAFE conversion | 12,000,000 | 50.0% |
| After the round, fully diluted3,000,000 new shares at about $0.67 ($8,000,000 ÷ 12,000,000 = $0.6667) | 15,000,000 | 40.0% |
What the term means
A founder’s ownership is usually quoted as a share of the shares that exist. A term sheet quotes it, and prices the round, on a share of the shares that could exist: the fully diluted capitalization. Both numbers are correct. They answer different questions, and the term sheet’s definition decides which claims on the company are counted before the price per share is set.
The definition is written into the price clause. The Venture Deals form reads: “fully diluted assumes the conversion of all outstanding preferred stock of the Company, the exercise of all authorized and currently existing stock options and warrants of the Company, and the increase of the Company’s existing option pool by [X] shares prior to this financing”. The CVCA model term sheet used in Canadian rounds sets the price per share “on the basis of a fully-diluted pre-money valuation” that “shall include an [unallocated and uncommitted] employee option pool representing [__]% of the fully-diluted post-money capitalization”. The pool, in other words, is sized as a share of the company after the round and counted before the price is set.
Two Canadian points. Canadian corporations commonly authorize an unlimited number of shares, so the count never includes authorized but unissued shares; the pool is the number of shares the board has reserved under the option plan, and nothing more. And the model term sheet’s wording distinguishes three kinds of option: granted, committed (promised in an offer letter but not yet granted) and unallocated. All three are in the count.
What the count includes
A fully diluted count, as term sheets usually define it, takes in the issued shares, common and preferred alike, with the preferred counted as the common shares they convert into; every option and warrant granted, as if exercised, whether or not it has vested; every grant committed but not yet made; the whole unallocated option pool after any top-up the term sheet requires; and every SAFE and convertible note outstanding, as the shares it is taken to convert into on the round’s terms. It leaves out the new money. The investor’s shares are added afterwards, which is what makes the count a pre-money figure.
The SAFE and note line deserves attention. The number of shares a SAFE converts into depends on its valuation cap, any discount and its own definition of the company’s capitalization, and the answer changes with the size of the pool and the price of the round. The pro forma cap table is where that number is worked out; Conversion Mechanics and Failure Modes covers the arithmetic. In the example below it is taken as 2,000,000 shares.
One cap table, counted three ways
| Founders, common shares | 6,000,000 |
| Seed investors, preferred shares converting one for one | 2,000,000 |
| Issued shares | 8,000,000 |
| Options granted, as if exercised | 1,000,000 |
| Unallocated pool before the round | 400,000 |
| SAFEs, taken to convert into | 2,000,000 |
The term sheet offers $2,000,000 at an $8,000,000 pre-money valuation, for 20 per cent, and requires the unallocated pool to be topped up to 1,000,000 shares before the round.
| The count | Shares | Founders |
|---|---|---|
| Issued shares | 8,000,000 | 75.0% |
| Fully diluted, before the pool top-up | 11,400,000 | 52.6% |
| Fully diluted, as the term sheet defines it | 12,000,000 | 50.0% |
Nothing has been issued and no money has changed hands. The founders’ 6,000,000 shares are 75 per cent of what exists, 52.6 per cent of what exists or has been promised, and 50 per cent of the count the term sheet uses, which adds the 600,000-share top-up. The first two moves are changes in what is counted. The round comes next.
The round
The price per share is the pre-money valuation divided by the fully diluted count: $8,000,000 ÷ 12,000,000 = $0.6667, about 67 cents. For $2,000,000 the investor receives 3,000,000 shares. On the same fully diluted basis the company now has 15,000,000 shares, the post-money valuation is $10,000,000, and the investor holds 20 per cent, which is the figure the term sheet promised. Everyone else has been diluted by the same fifth.
| Holder | Shares | Stake |
|---|---|---|
| Founders | 6,000,000 | 40.0% |
| New investor | 3,000,000 | 20.0% |
| Seed investors | 2,000,000 | 13.3% |
| SAFE holders, on conversion | 2,000,000 | 13.3% |
| Options granted | 1,000,000 | 6.7% |
| Unallocated pool | 1,000,000 | 6.7% |
Issued shares after the closing are 13,000,000: the 8,000,000 that existed, the investor’s 3,000,000 and the 2,000,000 issued to the SAFE holders on conversion. The other 2,000,000 in the fully diluted count are options, granted or reserved, and they dilute the founders only as they are exercised. Ownership in a term sheet is nonetheless quoted on the fully diluted figure, because that is the figure the price was set on.
Where the pool top-up sits
Most of the shares added to the count were promised before the round: the granted options, the SAFEs, the pool that already existed. The 600,000-share top-up was not. It is created for the round, and the term sheet counts it in the pre-money, so it is paid for by the existing shareholders, founders included, and not by the new investor. Osler’s Deal Points Report describes the practice as it stands in Canada: “any increase in the available option pool is typically counted in the pre-money shares and, as a result, reduces the company’s effective pre-money valuation”.
The example shows the reduction. The price per share, $0.6667, multiplied by the 11,400,000 shares that existed or had been promised before the top-up gives $7,600,000. That is the effective pre-money valuation of the company as it stood. The remaining $400,000 of the $8,000,000 headline is the top-up, valued at the round price. Had the same 600,000 shares been added after the closing instead, the price would have been $8,000,000 ÷ 11,400,000, or $0.7018; the investor would have received 2,850,000 shares and ended at 19.2 per cent, and the founders at 40.4, with the pool’s cost shared by everyone on the cap table including the new money. Venture Deals makes the same point with a 10 per cent pool raised to 20: the investors hold 20 per cent either way, and the difference comes out of the existing shareholders, at “a lower price per share for the new investors and effectively a lower premoney valuation”.
What a founder can ask for
The definition is a negotiated term, and four points do most of the work. The definition itself should be written out in the term sheet rather than left to a phrase, so that the count is agreed before the pro forma cap table is built. The pool top-up should be sized to the hiring plan to the next financing and no further; Venture Deals suggests offering full anti-dilution protection for a later increase in place of a larger pool now, where the founders believe the existing pool is enough. The SAFEs and notes should be counted on their actual conversion terms, not a rounded assumption, since their conversion shares come out of the pre-money count. And the pro forma cap table, showing every holder’s shares and percentage on the closing date, should be a condition of signing, because the percentage in the term sheet is a promise to the investor and the pro forma is where the founders find out what is left for them. Warrants far out of the money and unlikely to be exercised are a fair subject for discussion, though investors will generally expect them counted.
How much founders hold, in practice
Carta’s Founder Ownership Report 2026, published in March 2026 from rounds raised on Carta between 2021 and 2025, mostly by US companies, puts the median founding team at about 56 per cent of fully diluted equity after the seed round and 36 per cent after Series A, with a median employee pool of 12.1 per cent at seed. The figures are fully diluted, as term sheets quote them. A founder comparing a term sheet with those medians should compare like with like: the percentage that matters is the one on the pro forma, counted the way the term sheet counts.
Questions founders ask
What does fully diluted mean in a term sheet?
A count of shares that treats every option and warrant as exercised, every SAFE and note as converted, and the option pool, including the unallocated part after any top-up, as if it were already granted. The term sheet defines the count, and the price per share is the pre-money valuation divided by it.
Does the fully diluted count include the unallocated option pool?
Under the usual term sheet, yes, including any top-up the investor requires before the round. The CVCA model term sheet counts an unallocated and uncommitted pool inside the pre-money valuation, sized as a percentage of the fully diluted post-money capitalization.
Why does a larger option pool lower the price per share?
The price per share is the pre-money valuation divided by the fully diluted count. Adding shares to the count while the valuation stays the same lowers the price, so the investor’s money buys more shares. In the example, a top-up from 400,000 to 1,000,000 shares moves the price from $0.7018 to $0.6667 and the effective pre-money valuation from $8,000,000 to $7,600,000.
Is a founder’s percentage of issued shares wrong?
No. It answers a different question. Issued shares are what exists; fully diluted is what the term sheet counts. A founder who holds 75 per cent of the issued shares can hold 50 per cent on the term sheet’s count before the round, and the term sheet’s count is the one the price is set on.
Next in this series: Liquidation Preferences Explained
Related: Option Pools: The Silent Valuation Killer · Pre-Money vs Post-Money · Conversion Mechanics and Failure Modes
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Published 29 December 2025 · Updated 17 September 2026 · Khaled El Fauri