Dilution
The reduction in existing shareholders' ownership percentage when new shares are issued — typically through fundraising or employee stock option grants.
What is Dilution?
Dilution happens whenever new shares are created. When you raise a $2M round at a $10M post-money valuation, you're creating new shares that represent 20% of the company. Everyone who owned shares before now owns a proportionally smaller percentage.
Dilution is a natural part of startup fundraising. Most founders are diluted 15-25% per round. After a seed and Series A, a founder who started with 100% might own 50-60% (less with co-founders and option pools).
There's also dilution from employee option pools, which are typically 10-20% of the company set aside for hiring incentives. This dilution is usually baked into the pre-money valuation at each round.
Why it matters
Dilution is the cost of capital. Every dollar you raise comes at the price of giving away a piece of your company. Understanding dilution helps you make better fundraising decisions — how much to raise, at what valuation, and whether to raise at all.
Excessive dilution can demotivate founders and early employees. If a founder's stake drops too low through multiple rounds of dilution, they may lose the financial incentive to continue pushing.
Formula
Dilution % = New Shares Issued / (Existing Shares + New Shares Issued) Alternatively: Dilution % = Investment Amount / Post-Money Valuation
Example
You own 60% of your company pre-round. You raise $3M at a $12M post-money valuation (25% to new investors). Your new ownership = 60% × (1 - 25%) = 45%. You went from 60% to 45% — that's 25% dilution on your stake.
Common mistakes
- 1Not accounting for option pool dilution that happens before the round closes
- 2Thinking dilution only comes from fundraising (options, SAFEs, and conversions also dilute)
- 3Focusing only on percentage owned instead of the value of that percentage
Make smarter fundraising decisions
RunwayCal shows how your financial position affects fundraising timing — so you can raise from a position of strength and minimize dilution.
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