There are three dilutive instruments that we want to look at when calculating our diluted number of shares The first is employee stock options, the second restricted share units or RSUs. And third, convertible bonds We need to calculate the number of new shares created by each of the dilutive instruments The third one, convertible bonds, we use an "as if converted" method I.e. if the convertible bonds were converted today, how many new shares would be created? Relatively straight forward With the employee stock options and the RSUs, instead we have to use something called the treasury method Now the treasury method says that your net dilution (the number of new shares) will be the number of options outstanding times by the maximum of zero and the share price minus the strike price over the share price Now why do we do this maximum of zero and that figure? Because we want this to be a positive number If the share price were lower than the strike price, it would give us a negative number and this will not happen If the share price were below the strike price, your options would not be exercised Fantastic! We'll use that for our employee stock options and the RSUs If we're using it for the RSUs though, the strike price will be zero Remember another term for strike price is exercise price In this treasury method example, we've got a table with information on employee stock options At the top on the left hand side, we're given the number of options outstanding at the beginning of the period (January 1st) That number then goes up for the number of options granted The number then goes down, there's a subtraction for the number exercised and for the number forfeited or expired That then gives us the number outstanding at December 31st and that's the number we want The number of options is 2,221,181 And the weighted average exercise price or strike price is 108.01 Generally we want to use options outstanding rather than exercisable or vested and expected to vest Why do we want to use the options outstanding rather than just exercisable? Well the number exercisable at the moment 641,592 That's the number that the CEO, management, employees could exercise right now but they haven't They're maybe hoping the share price is going to go up However, in the future there could be a full 2.2 million that could be exercised So why not just go with the 641,000? Well the reason is, if this company were to be purchased today What will be written into the options, will be that if the company has purchased, all options are instantly exercisable So it won't just be the 641,000, it will be the 2.2 million So let's drop that information into our treasury method calculation The net dilution or the new shares created is the 2,221,181 options outstanding times by the maximum of zero and the share price, which we haven't been given in the table. So that's 117.16 Minus the exercise price which is in the table 108.01, all over the share price again So from the 2.2 million options, we actually end up having new shares of 173,470.5