Fully Diluted Market Value

When someone asks you how much of a company you own, the answer could be two very different numbers. You might own 10,000 shares and there might be 1mm shares issued and outstanding. That would suggest you own 1% of the company. And that would be correct, as of right now.

What is often not calculated in these sorts of numbers is future dilution, particularly dilution that is visible if you look closely. The most common form of future dilution that is visible are outstanding options and warrants to issue stock that have not been exercised.

Let’s say this fictional company that has 1mm shares outstanding also has a 20% unissued option pool (so 200,000 options in it), and lenders have warrants to purchase 50,000 shares.

That would be another 250,000 shares that are not issued, but will be at some point, making the “fully diluted shares outstanding” equal to 1.25mm, and your 10,000 shares now represent 0.8% of the company. That is your “fully diluted ownership.”

Nowhere is this issue more important than the crypto token sector. There are many crypto tokens trading in the market that have a relatively small amount of their total supply outstanding and the market value numbers on many of the sites that track this market are a bit misleading.

For this reason, I like the concept of “year 2050 market cap” that the site OnChainFx reports.

Take Numeraire, a token issued by our portfolio company Numerai, and a token that USV owns some of (that is a disclosure if anyone is confused).

Coinmarketcap reports Numeraire’s market cap at roughly $7mm suggesting that you could purchase 1% of Numeraire for $70k.

But by 2050, there will be a lot more Numeraire out there and as OnChainFX reports, the 2050 Market Cap is more like $110mm. It would take more like $1mm to purchase 1% of Numeraire’s total supply.

This concept of a market cap that includes future dilution is called a “Fully Diluted Market Value” and it is something investors need to be focused on when thinking about value, upside, and dilution.


Comments (Archived):

  1. William Mougayar

    The crypto token markets have a life of their own. The big blind spot is the vesting periods of tokens, and the fact that some of these ICOs have a fixed supply whereas others can continue minting new tokens. Tracking and accounting accurately is challenging.

    1. PhilipSugar

      Here is the question. Is it can not or should not? Big difference.

    2. JLM

      .Haha, I thought one of the big features of the blockchain was the ability to account for huge numbers of transactions simultaneously?JLMwww.themusingsofthebigredca…

      1. William Mougayar

        It does, but that’s not related to bad accounting practices by the token issuers.

  2. Pointsandfigures

    all about how the waterfall flows when you try to ring the cash register.

    1. JamesHRH

      You mean, convert crypto into something of value?I am getting less bullish on my call. If this is a bubble, it’s a big one that is taking forever to inflate.

      1. Girish Mehta

        What is your call ?

        1. JamesHRH

          It’s a nothing burger.The distributed ledger idea gets built out by 100’s if not 1000’s of institutions for their own purposes.Today’s BlockChain billionaires are 1998 Mark Cuban – they need to sell to a sucker.

          1. LE

            Also have to be a gambler. Cuban would not have gotten as big of a number as he did if he didn’t play the game and hold out. No deal is guaranteed. He could have folded earlier (a safer strategy for sure) because there is always the chance that at a certain point the buyer walks and you end up with zero. The base value for something speculative can be a 10th of what you get by gambling and playing it out.There is a great difference when you are gambling and the other side is a human (or in the case of Yahoo the plural) instead of a non human (machine or the weather let’s say). Humans can and do change course. Humans are susceptible to FUD.I wonder if VC’s or angels when investing assess to what degree the founders are gamblers because it would seem to have impact on a future exit strategy. Also ‘death wish’ or ‘tempt death’ (ie Elon Musk).

          2. Girish Mehta

            Re-attaching my old comment that a bubble is not a good way to characterize bitcoin.https://disqus.com/home/dis…I am highly skeptical of bitcoin. But, that bubble argument is a distraction that opens up questions about other forms of money. Like a judge would say – “you opened the door to that line of questioning counselor, now I am going to allow your opponent to walk through it”.

          3. Andrew Cashion

            I’d put more money on you having an affair with The Crypto than you buying it directly.Why buy?

      2. Andrew Cashion

        Bitcoin will meet its Waterloo.Just not anytime soon.

        1. jason wright

          It may not be antifragile (although as volatility in the alts market increases bitcoin’s cap dominance grows, and so perhaps it does have a measure of antifragility ), but it is robust.Bitcoin’s tenth anniversary in coming up soon. If Taleb is right then it has at least another ten years ahead of it.

          1. Girish Mehta

            The Lindy effect is a good framework but there are event-exceptions. Dinosaurs lived for 165 million years, a time-span so long that we are closer in time to the T-Rex, than the T-Rex was to the Stegosaurus. Yet, they went extinct.

          2. jason wright

            i’m thinking that a black swan event capable of ending bitcoin would also end all other crypto networks. a reasonable assumption?for all of their success and longevity dinosaurs were just not able to gain from extremely rare ultimate forms of disorder. not surprising when an object the size of Manhattan smacks you on the head.

          3. Girish Mehta

            I gave that as a example re external event-exceptions, didn’t mean that I think same about bitcoin re extinction.I am not asserting that bitcoin will become extinct. I don’t know. I have said here a few times that it could survive as a alternative asset class, and on the fringes.My skepticism is about Bitcoin becoming mainstream. I don’t see that happening.

          4. Amar

            Conclusion: The Lindy Effect and The Black Swan are interesting analytics frameworks that can and do impact each other

          5. Girish Mehta

            Good way to think about it.Separately, I have no clear point of view about bitcoin re extinction (my reply to Jason below). I don’t know.

    2. PhilipSugar

      I assume you mean preferences. That is what kicks people in the groin.

      1. Pointsandfigures

        Best to wear a cup!

  3. Simone Brunozzi

    Fred, I feel in strong disagreement with your conclusion.Your Numeraire example essentially means that you want to include future “issuing” of shares (or tokens), and that because there will be many more in 2050, the total market cap is much higher than what’s reported by many.Let me give you a counterexample to explain why I think this is wrong.I have a startup, Fabrica. Current number of shares is ~8.7M. Let’s say I promise that there will be another 92.3M shares issued in the next few years. Does this mean that the “total value”, or “market cap”, of my company is now magically 11.5x higher? What if I promise to issue 1B shares – can I claim that my company is a unicorn?I think I know why the current mechanism is also misleading; however, the solution you/OnChainFX propose is equally misleading. There should be a better way.

    1. jason wright

      Where can i find Fabrica?

      1. Simone Brunozzi

        Hmm, what for? My point was to provide an example.

        1. jason wright

          curiosity. the best of reasons.

          1. Simone Brunozzi

            Ah, that’s fair 🙂 – http://www.fabrica.city, if you need to know more, simone at fabrica.city

          2. Roberto Magnifico

            and probably quite simply more than a legitimate question, given it is publicly mentioned as a given.

  4. LE

    The 2050 is just arbitrary? Why 2050. The FAQ says this:The Y2050 figures are not predictions! Marketcap is simply current price * supply. For our “~Fully Diluted (Y2050) Marketcap” figure, we are using the expected supply in the year 2050 as the supply figure for that equation. Thus this represents how the market is currently valuing the asset on a ~fully diluted basis.More specifically why is it 2050 and not 2030 or 2038 etc?

    1. William Mougayar

      Yup, that 2050 timeframe is utterly absurd. That’s 32 years from now. Are these coins supposed to behave like a Bordeaux wine?

      1. Lawrence Brass

        HODL.. to death, probably in my case.Unless I take my telomere therapy pills daily without a miss or.. a glass of bordeaux.

        1. jason wright

          three things in life are now guaranteed.

      2. jason wright

        this is what a bottle (or three) of Bordeaux can do to a rational mind.i remember when Numeraire was released and people were buying it at $150. They soon started feeling the hurt.$3 seems like reasonable value. $5 is looking a bit pricey.

  5. LE

    When someone asks you how much of a company you own, the answer could be two very different numbers. You might own 10,000 shares and there might be 1mm shares issued and outstanding. That would suggest you own 1% of the company. And that would be correct, as of right now.It is correct because that is what they mean when as a business question, it is asked using ‘now’. If they wanted to know what it was under some other condition or time frame or circumstance then the question would be different. [1] You don’t answer a question about value (honestly at least) using numbers that don’t exist yet. Unless that ‘yet’ is right around the corner and guaranteed in some way. Or it’s harmless rounding or you are Elon Musk.That would be another 250,000 shares that are not issued, but will be at some pointIs it really ‘will’ instead of ‘could’?[1] There are notable exceptions to this in common use when someone asks (or a lists talks about ‘net worth’). In that case the person asked (or the list which features someone) never takes into account that a spouse in many circumstances own well over 50% of the assets at a certain point in marriage. So when someone is said to be worth $5 billion dollars they really aren’t. With their spouse they are but not by themselves. [2][2] This would be an interesting blog post or list that would garner attention. Take the Forbes list and create a new column which shows the net net worth taking into account marital status. Sure to get publicity and change the list order.

  6. Popa Bogdan

    I am thinking at kin, with around 7-10% of the tokens out. Do you think the inflation model there can/must be improved? On the other side if a token creates demand, price increase can outpace inflation. BTC, ETH, XLM are examples of incredible ROI while suffering 100% or more supply increase…

  7. JLM

    .There are several different concepts at work here which are being used in a confusing manner. There are three concepts at work here: garden variety share accounting, ownership, and voting.This all fits into a legal, GAAP, and stock market framework which can be tracked to the individual share. And, they have to be.From a legal perspective, a company founder first draws up Articles of Incorporation and Corporate Bylaws (technically the board of directors, but initially the founders are the board).Traditionally, the Articles of Incorporation simply provide the essential pertinent information to form an enterprise in the state of domicile – name, address, process of service agent, number of shares and type to be issued and to whom.Art of Inc are drawn by founders and state the classes (common, preferred) of stock. This is the “authorized” number of shares.Traditionally, the Corporate Bylaws are drawn after the Art of Inc are completed and set out the rules by which the new corp will be governed. They are traditionally drafted by the Board of Directors — if the founders are the initial BoD, then the overlap is obvious.To be considered “sufficient” Corp Bylaws have had historically to include : a statement of purpose (tax status), members, board of directors, shareholders’ meetings, committees, stock certificate issuance (voting rights), officers, indemnification provisions, conflicts of interest, and the method of amendment.Each of these subdivisions has 10 different bullet points beneath it. As an example how a shareholders’ meeting can be called by the company, the board, or the shareholders, but the Corp Bylaws fall into those larger subdivisions.This is the minimum and all Corp Bylaws will be far more expansive than the minimum. In the Corp Bylaws, you will find the shares issued to the founders. This is the shares “outstanding” as of the date of inception.Art of Inc = shares authorizedCorp Bylaws = shares outstanding (founder shares)In the Corp Bylaws, the officers have been authorized to propose for board approval the creation of an incentive comp plan – option plan. Also, they should be granted the authority, with board approval, to issue warrants under certain specific conditions (primarily when pursuing financing).The option plan is a written plan and has to comply with IRS considerations. In this instance, let’s say the option plan has 1,000,000 shares. These options are subdivided between options issued and those unissued.So, we have (fictitious numbers for discussion only):Art of Inc = 10,000,000 shares of common stock authorizedCorp Bylaws = 5,000,000 shares issued to foundersOption Plan = 1,000,000 options reserved for issuanceUnissued shares = 4,000,000One more complication is created when options are issued which “reserves” some of those 1,000,000 shares.Then, you have (faux numbers):Options authorized = 1,000,000 sharesOptions reserved = 200,000 sharesOptions authorized, but not reserved = 800,000 sharesLet’s stop for a second – what has been undiscussed is that only common stock which has been issued can be voted. In this case, only the 5,000,000 shares held by the founders can be voted. This is very important because these voting shares will pick the board. When a VC receives a promise of a board seat, what he is really receiving is a promise from the voting shares to vote for the VC’s candidate.The term “fully diluted” means that the share base includes the shares outstanding and issued (founder shares) and those which could be issued whether they are “in the money” or not. Consider warrants the same as options.This is the number which should be used when considering “earnings per fully diluted share” which is the box GAAP sticks you in.There is one more complication. Say a founder bails and the company buys back some of his stock. That stock is now “treasury” stock which is not included in earnings calculations or voting.Art of Inc = 10,000,000 sh authorizedCorp Bylaws = 5,000,000 sh issued Founder A = 2,500,000 sh Founder B = 1,500,000 sh Fdr B stock held in treasury = 1,000,000 shOptions = 1,000,000 sh reserved Options issued = 200,000 sh Options unissued = 800,000 shFully diluted shares = 5,000,000 (founder shares) + 1,000,000 (option shares reserved) – 1,000,000 (treasury shares) = 5,000,000 shVoting shares = 5,000,000 (founder shares) – 1,000,000 (treasury shares) = 4,000,000 shSmart founders create a “Founding Shareholders Agreement” which explains all of this in a semi-redundant manner with the Corp Bylaws, but also includes a Voting Proxy or Voting Agreement whereby the founders agree to vote the same on everything, and Employment Agreements.This Voting Proxy is very important when you have multiple founders or junior founders. It is a huge control issue.When a new shareholder comes on board (VC investor), the existing documentation in place Art of Inc Corp Bylaws Option Plan Founding Shareholders Agreement Voting Proxy/Voting Agreement Employment Agreementmakes the new money into “plug and play” which simplifies everything.The VCs will demand some changes, but with the framework in place, it is easy to do and the founders have the complete ability to do it as they are both the officers and board of the pre-investment enterprise.The VC changes can be further codified in a new Shareholders Agreement which will stand alone without requiring any changes to the founding docs. When extensive changes are made to the founding docs, it is wise to “Amend and Restate” them so it is clear they are the only deal. When you amend and restate, you abandon the previous docs.This is a lot of trigger work and you will get a lot of conflicting advice on this. I speak only from the perspective of a CEO or founder.In this manner, you stay on the right path as to corporate documentation, corporate authority, stock accounting, GAAP, voting, and new investment.Never, ever deal in percentages. Only use the number of shares.JLMwww.themusingofthebigredcar…PS – always make certain that the Option Plan reserved but unissued shares revert to the founders in the event of a sale or liquidation.

    1. sigmaalgebra


    2. Richard

      Signed, Mike Drop

  8. Mike Geer (MG)

    “(that is a disclosure if anyone is confused)” <- hehe