Issued Shares vs. Fully Diluted Shares
Issued shares are the shares that exist today on the share register: founder common, employee common (from exercised options), preferred shares from prior rounds. These are the shares that vote, that receive dividends, that show up in the company's official records.
Fully diluted shares include issued shares plus everything that could become a share through a contractual conversion or exercise: outstanding options (granted but unexercised), reserved option pool (authorised but ungranted), warrants (any kind), convertible notes (on as-converted basis), SAFEs (on as-converted basis), and any other instrument that converts into equity at a future event.
The two numbers differ by 20–40% at most early-stage companies because the option pool alone is typically 10–20% of fully diluted, and convertible instruments add more. Investors price on fully diluted because they price the company they are buying — which includes the obligations the company has already made to employees, lenders, and prior round investors.
What Gets Included in Fully Diluted
A complete fully diluted calculation includes every one of the following:
• Outstanding common stock (founders, exercised employee options, common-share angels). • Outstanding preferred stock on an as-converted-to-common basis. A Series A preferred share with a 1:1 conversion ratio counts as one common-equivalent share. A Series B with a 1.2:1 ratio after anti-dilution counts as 1.2. • Granted options that are vested or unvested but not yet cancelled. These count even if the option holder has not exercised. • Reserved option pool (authorised but ungranted). The full pool counts, not just the granted portion, because the company has committed to issuing those options at the board's discretion. • Warrants of any flavour (venture debt warrants, lender warrants, advisor warrants, customer warrants). • Convertible notes on the as-converted basis defined in the note documents (typically valuation cap or discount at the next round). If the next round has not yet happened, the conversion is modelled assuming the current round prices. • SAFEs on the as-converted basis. Post-money SAFEs convert at the cap; pre-money SAFEs convert with the round. • Phantom stock and SARs if they settle in equity. If they settle in cash, exclude them.
The total is the denominator for every ownership percentage calculation that matters: founder %, employee %, investor %, and the post-money valuation per share.
Why Investors Always Price on Fully Diluted
Two structural reasons. First, fully diluted captures the true economic ownership of the company. The investor is buying X% of the post-money entity — they need to know exactly how many shares are entitled to participate in future value creation, including the ones the company has already promised but not yet issued.
Second, fully diluted protects the investor from issuance dilution between the term sheet and the closing. If the company issues new options to a key hire after the term sheet but before close, fully diluted pricing means the investor's percentage is preserved (the new option came out of the existing pool, not from new shares). If the company refreshes the option pool, that refresh is built into the pre-money via the 'option pool shuffle' — see [option pool shuffle](/captable/option-pool-shuffle).
The founder's mental adjustment: stop thinking about your ownership as 'shares I hold / shares issued today.' Start thinking about it as 'shares I hold / shares on a fully diluted, as-converted basis after the pool refresh.' The two numbers can differ by 10+ percentage points at Series A.
ESOP Refresh Effect on Fully Diluted Count
Every priced round typically includes an option pool refresh — the new lead investor wants the post-round option pool to support 18–24 months of hiring before the next round. Typical refresh sizes: pre-seed 10–12%, seed 12–15%, Series A 12–17%, Series B 8–12% of post-money fully diluted.
The refresh is included in the pre-money fully diluted calculation, which means the dilution from the refresh hits existing shareholders (founders and prior round investors), not the new round investor. This is the 'option pool shuffle' and it is the single most consistent founder surprise at term sheet review.
Worked impact: a Series A investor demands a 15% post-money option pool. Pre-refresh, the pool is 2% of fully diluted. The refresh adds 13 percentage points of pool, which dilute existing shareholders pro rata. On a €16M pre-money / €4M round = €20M post-money, the 13-point pool refresh equals €2.6M of value that comes out of existing shareholders' pre-money — effectively reducing the true pre-money to €13.4M. See [equity dilution](/captable/equity-dilution).
How Fully Diluted Flows into Valuation Math
Post-money valuation = round size + pre-money. Post-money share price = post-money valuation / post-money fully diluted shares. Investor share count = investment / post-money share price. Investor ownership % = investor share count / post-money fully diluted shares.
Every step uses fully diluted as the denominator. A 5% discrepancy in fully diluted (e.g. forgetting to include a SAFE) translates directly into a 5% discrepancy in the investor's price-per-share and ownership percentage. Lawyers and CFOs spend hours reconciling fully diluted numbers in the final days before closing because a difference of 100,000 shares can move €200K of price-per-share calculations.
The discipline that prevents reconciliation pain: maintain one source of truth for fully diluted (the cap table software or master spreadsheet), include every convertible instrument with explicit conversion math, and reconcile against the company register and shareholder agreements monthly. See [cap table management](/captable/cap-table-management), [cap table due diligence](/captable/cap-table-due-diligence), [pre-money post-money valuation](/captable/pre-money-post-money-valuation), and [dilution modeling](/captable/dilution-modeling) for the supporting frameworks.