Dilution

What is Dilution?

Dilution is the reduction in ownership percentage that occurs when new shares are issued. When your company raises money or grants equity, new shares are created, and everyone's percentage ownership decreases.

Dilution is not inherently bad. If new investment grows the company's value, you can own a smaller percentage of something worth much more. 10% of $100M is better than 50% of $1M.

Why Dilution Matters

Excessive dilution erodes founder motivation and control. If you own less than 10% after several rounds, your economic incentive is weakened. Institutional investors typically want founders to retain meaningful ownership.

Each round of funding typically dilutes existing shareholders by 15-25%. After multiple rounds, early shareholders can be significantly diluted, which is why ownership percentage at exit matters more than percentage after each round.

Managing Dilution

Raise only what you need. Grow revenue to command higher valuations. Negotiate pro-rata rights to maintain percentage. Understand the cumulative effect across multiple rounds.

Before Series A:

• You own: 60% of 10M shares = 6M shares

Series A terms:

• New shares issued: 2.5M
• Total shares after: 12.5M

Your ownership after: 6M ÷ 12.5M = 48%

Dilution = 60% - 48% = 12 percentage points

You still own 6M shares, but they represent a smaller piece of a larger pie.