{"id":219703,"date":"2023-01-10T15:03:16","date_gmt":"2023-01-10T02:03:16","guid":{"rendered":"https:\/\/legalvision.co.nz\/?p=219703"},"modified":"2024-11-06T13:27:21","modified_gmt":"2024-11-06T00:27:21","slug":"fully-diluted-shares","status":"publish","type":"post","link":"https:\/\/legalvision.co.nz\/capital-raising\/fully-diluted-shares\/","title":{"rendered":"What are Fully Diluted Shares in NZ?"},"content":{"rendered":"\n

If you have a business that issues securities to investors, it is important to know the different ways you can issue securities. Shares are a security that represents immediate ownership in a business. The owners of a business are called the shareholders. If you add more owners to your business, shares become diluted as the number of shareholders increase. This article will explore what the term \u201cfully diluted\u201d means so you are equipped to negotiate with future investors.<\/p>\n\n\n\n

What are Fully Diluted Shares?<\/h2>\n\n\n\n

When somebody looks at the amount of shares a company has on the Companies Office website or in the company\u2019s share register, they may believe that this is the total number of securities currently on issue. However, this amount is only the amount of shares, being only one form of security, currently on issue. This number of shares shows the undiluted share position of the company. There are many securities that individuals may hold that are not shares but could turn into shares in the future. Including these in the total number of securities on issue will tell you the fully diluted amount of shares.<\/p>\n\n\n\n

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One of the main reasons why it is important to take into account fully diluted shares is so that future and current shareholders are aware of how much their shares may be diluted. This dilution will be due to securities that were issued<\/a> previously that may convert into shares in the future, thereby diluting the holding they would otherwise have.<\/p>\n<\/div>\n\n\n\n

What Securities are Part of the Fully Diluted Shares Amount?<\/h2>\n\n\n\n

Options<\/h3>\n\n\n\n

One of the most common types of securities that can turn into shares are options. As the name suggests, an option allows the option holder to buy shares at a certain price in the future. This price is pre-determined when the option is issued and is often referred to as the \u201cstrike price\u201d. The option holder receives a benefit when they exercise their option into shares at the strike price, at a point in time when the actual share price is higher.<\/p>\n\n\n\n

Convertible Notes<\/h3>\n\n\n\n

Another type of security that you can convert into shares is a convertible note<\/a>. A convertible note is a hybrid debt\/equity instrument. It acts as a debt instrument in the short term. Effectively, the convertible note holder is treated as lending money to the company, which incurs interest. The company then issues shares at a later date on a pre-determined \u201ctrigger event\u201d. The value of those shares is the aggregate amount of the lending and any accrued interest. It is essential to include convertible notes when you calculate fully diluted shares. This is because once issued, they dilute the current shareholdings.<\/p>\n\n\n\n

Simple Agreement for Future Equity <\/h3>\n\n\n\n

Further security that can be converted into shares is a simple agreement for future equity.<\/p>\n\n\n\n

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A novel security, a simple agreement for future equity or \u2018SAFE\u2019 is an agreement whereby an investor will provide capital to a business with the expectation that they receive equity at some point in the future.<\/p>\n<\/div>\n\n\n\n

The point that they receive equity will be a pre-determined \u201ctrigger event\u201d. A trigger event for both SAFEs and convertible notes might be:<\/p>\n\n\n\n