There are a lot of little nuances that can come up in connection with term sheet negotiations. One of my clients recently brought one of the more irrational ones to my attention with a question about what is and what is not fully diluted. 

It began with the cap table where the option pool first appears. When determining their investment and the pre and post money valuation, the investors assume the issuance in full of the entire option pool. Just to be clear, if the investors want 50% of the company, they mean after all options in the pool have been granted. (So, if you imagine that there will be 10 million shares outstanding after a financing and the VC expects to own 50%, then they will own 5 million shares and the other 5 million will be split among all other interests (the common and the option pool – among others).

Well, that is fine. After all, the valuation is the valuation. But what happens when it comes to calculating the weighted average antidilution? [There is a complex formula that I don’t want to go into in detail. Suffice it to say that the bigger the denominator the smaller the adjustment to the antidilution ratio.]   For the purpose of the antidilution calculation the denominator includes all issued and outstanding shares (including those that could be issued upon the exercise of granted options. Note the use of the word “granted” as opposed to the entire pool. Something approaching 99% of all deals that have weighted average antidilution work with only granted options and therefore have their thumb on the scale in favor of the investor.

Now this is in many ways just a small (minute) point since the difference in the two calculations is likely to be minimal. So, in the grander scheme of things it isn’t worth much of an argument. Despite the seeming unfairness of this inconsistency, save your powder for bigger points.