Treasury Stock Method (TSM)
Definition
The treasury stock method calculates the dilution from in-the-money options and warrants. It assumes all in-the-money options are exercised, the company receives the exercise proceeds (options x strike price), and uses those proceeds to buy back shares at the current market price.
Net new shares = options outstanding − (options x strike / current price), equivalently options x (1 − strike/price). Example: 100 options with a $10 strike, stock at $20: exercise creates 100 shares, proceeds of $1,000 buy back 50 shares at $20, so net dilution is 50 shares.
Only in-the-money options (strike below current price) are included — out-of-the-money options would not rationally be exercised. RSUs are typically added in full (no proceeds), and unvested awards may or may not be included depending on convention (interview convention usually includes all in-the-money options).
Why interviewers ask
TSM arithmetic is one of the most common on-the-spot math tests: interviewers give you options, a strike, and a share price and expect the net share count in seconds. Traps: forgetting the buyback step (counting gross rather than net shares), including out-of-the-money options, and forgetting RSUs dilute in full.
Related terms
Interviews don't test definitions — they test recall under pressure.
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