“Share capital on a fully diluted basis” refers to the total number of shares a company would have outstanding if all potential dilutive securities, such as stock options, warrants, convertible bonds, or any other financial instruments that can be converted into common shares, were exercised or converted.
Fully diluted share capital takes into account not only the currently issued and outstanding common shares but also all the potential common shares that could be created through the conversion or exercise of these securities. It is often used as a more comprehensive measure of a company's equity ownership because it accounts for the potential impact of outstanding convertible securities on the ownership structure.
The formula for calculating share capital on a fully diluted basis is as follows:
Fully Diluted Share Capital = Issued and Outstanding Common Shares + Common Shares from the Conversion of Convertible Securities (e.g., stock options, convertible bonds, warrants)
For example, if a company has 1,000,000 common shares issued and outstanding and also has stock options that could potentially be converted into an additional 100,000 common shares, the fully diluted share capital would be 1,100,000 shares.
This metric is essential for various purposes, including financial reporting, equity ownership calculations, and determining the potential impact of dilutive securities on the ownership structure and voting rights of a company. It provides a more accurate picture of the company's capital structure, especially when evaluating the impact of stock-based compensation and other convertible instruments.