When investors ask about a company’s status on a “fully diluted basis” they want to know the total number of common and preferred shares that are currently “outstanding” in a company plus the total number of warrants, employee stock options, and converted preferred shares that might one day might become outstanding upon exercise by its holder.

A company’s share position on a fully diluted basis is usually larger than a company’s current number of shares outstanding, particularly if the company has an active employee stock option plan.

Extra Tip: Entrepreneurs should minimize the size of stock option pools before raising funds from investors because company valuations are usually based on a company’s fully-diluted status rather than current outstanding status.