In nearly all cases, investors will require that a company's fully diluted capitalization include any and all options and warrants that are outstanding prior to the investment. Because counting or not counting these items will impact the fully diluted capitalization and, as a result, the relative ownership interests after the financing, the parties to a financing should understand and carefully consider the following four items when negotiating term sheets. Although it is pretty much universal that any and all stock that has been issued prior to the financing is included in a company's fully diluted capitalization, there are variations around other items that may be included as part of the fully diluted capitalization. Wait a second, isn't a company's fully diluted capitalization set in stone? Generally, the pre-money value is constant − PPS and fully diluted capitalization are indirectly proportional ( i.e., as one goes up, the other goes down), so the larger the fully diluted capitalization, the smaller the amount an investor will pay per share (and, thus, the more shares the investor will receive for a given investment and the larger the portion of the company it will own after the financing). This is why fully diluted capitalization is an important determinant of ownership interests in a company after a financing. The formula used to derive the price per share (PPS) than an investor will pay for a company's stock is the following: PPS = pre-money value / fully diluted capitalization The other half of the story is what comprises the ''pre-money fully diluted capitalization.'' How does the pre-money fully diluted capitalization impact financing numbers?Īfter the pre-money valuation, what gets counted as part a company's pre-money fully-diluted capitalization has the biggest impact on relative ownership stakes in a company after a financing. However, valuation is only half of the story. Pre-money value has the single biggest impact on determining the percentage of a company an investor is going to acquire for a given investment (and, as a result, what percentage of the company the existing stockholders will retain).
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