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
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