Fully-Diluted Basis: A Comprehensive Guide to Its Legal Implications
Definition & Meaning
A fully-diluted basis refers to a method of calculating per share ratios by assuming that all potential shares of a company are issued. This includes shares from options, warrants, and convertible securities. The goal is to estimate the maximum number of common shares that could be outstanding, regardless of any vesting schedules or conversion conditions. This approach provides a clearer picture of a company's potential share distribution and value.
Legal Use & context
The term "fully-diluted basis" is commonly used in corporate finance and securities law. It is particularly relevant in the context of mergers and acquisitions, initial public offerings (IPOs), and investment analysis. Legal professionals may encounter this term when assessing a company's equity structure or when drafting agreements that involve stock options or convertible securities. Users can manage related paperwork using legal templates from US Legal Forms, which are designed by qualified attorneys.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A company has 1 million shares outstanding, 200,000 stock options, and 100,000 convertible preferred shares. On a fully-diluted basis, the total shares would be 1.3 million.
Example 2: In a hypothetical example, a startup with 500,000 shares and 50,000 warrants would calculate its fully-diluted shares as 550,000, assuming all warrants are exercised.