What Does FDV Mean and Why Does It Matter?

Fully Diluted Valuation (FDV) is a financial metric that assesses a company’s total worth. It represents the theoretical value of a company if all outstanding convertible securities were exercised. Understanding FDV helps investors and market participants gain a comprehensive view of a company’s potential valuation and future share count, providing insight into the impact of future share issuances on overall value.

Understanding Fully Diluted Valuation

Fully Diluted Valuation (FDV) is a comprehensive measure that reflects a company’s total value, assuming all potential sources of dilution have been realized. This concept encompasses two main components: the current share price and the fully diluted share count. The fully diluted share count includes shares currently outstanding and all potential shares that could be issued from convertible securities.

These potential shares arise from financial instruments designed to convert into common stock. Examples include employee stock options, which grant the holder the right to purchase company stock at a predetermined price, and warrants, which are similar rights. Convertible bonds and convertible preferred stock also contribute, as do unvested restricted stock units (RSUs). FDV provides a forward-looking perspective, illustrating a company’s valuation if all such potential conversions were to occur.

Calculating Fully Diluted Valuation

Fully Diluted Valuation is calculated by multiplying the current share price by the fully diluted share count. To determine the fully diluted share count, aggregate all currently outstanding shares with every potential share that could result from the conversion or exercise of dilutive securities. This includes securities like stock options, warrants, convertible debt, and preferred stock.

For example, a company has 10 million basic shares currently outstanding and a current share price of $50. It also has 1 million employee stock options, 500,000 warrants, and 2 million shares that could arise from convertible bonds. To calculate the fully diluted share count, these potential shares are added to the basic shares: 10,000,000 (outstanding) + 1,000,000 (options) + 500,000 (warrants) + 2,000,000 (convertible bonds) = 13,500,000 fully diluted shares. The Fully Diluted Valuation would then be 13,500,000 shares multiplied by the $50 current share price, resulting in an FDV of $675 million.

Why Fully Diluted Valuation Matters

Fully Diluted Valuation offers a more conservative and realistic view of a company’s total worth, particularly for investors in early-stage companies or those with intricate capital structures. It accounts for the potential increase in the number of shares outstanding, which can affect the value of existing shares. By considering all potential shares from convertible securities, FDV helps investors assess potential future returns, as an increased share count can dilute earnings per share.

For founders and employees, understanding FDV is equally important, as it clarifies the potential dilution of their equity stakes. This metric helps all stakeholders gauge the long-term prospects and potential risks associated with future share issuances and capital-raising activities. Analyzing FDV allows for more informed financial planning and decision-making for both the company and its equity holders.

FDV vs. Market Capitalization

Fully Diluted Valuation (FDV) and Market Capitalization (Market Cap) are distinct metrics for assessing a company’s value. Market Capitalization is calculated by multiplying the current share price by the number of shares currently outstanding in the market. This metric provides a snapshot of a company’s current value.

In contrast, FDV multiplies the current share price by the fully diluted share count, which includes all shares currently outstanding plus any shares that could be created from dilutive securities. Market Cap reflects the value of shares already in circulation, while FDV accounts for all potential future shares that could impact ownership and value. FDV offers a more complete picture of a company’s long-term valuation by anticipating future dilution.