Dilution
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The reduction in ownership percentage that existing shareholders experience when new shares are issued in a funding round.
Dilution is what happens to your ownership when the company issues new shares. If you own 50% of a company and a new investor buys 20%, your ownership drops to 40%. Your share count did not change, but the total number of shares increased, so your percentage decreased.
Dilution is the cost of raising capital. Each funding round dilutes existing shareholders. A founder who owns 100% at incorporation might own 50% after seed, 35% after Series A, and 25% after Series B. This is normal. The key question is whether the value of your smaller percentage is larger than the value of your larger percentage before the round.
Owning 25% of a $200M company ($50M) is better than owning 100% of a $2M company ($2M). Dilution is acceptable when the capital creates more value than the ownership given up. The cap table tracks exactly how dilution affects each shareholder across rounds.
Examples
A founder calculates dilution across rounds.
Post-incorporation: 50% ownership. Seed (20% dilution): 40%. Series A (20% dilution): 32%. Series B (15% dilution): 27%. Option pool grants along the way reduce it further. After three rounds, the founder owns roughly 25% of a much more valuable company.
Anti-dilution protections activate in a down round.
The Series A investors have weighted-average anti-dilution protection. The Series B is a down round. Their shares are adjusted to compensate for the lower valuation, meaning they get additional shares. The founders bear more of the dilution.
An option pool increases dilution for founders.
Before the Series A, the investor requires a 15% unallocated option pool. This pool comes from the pre-money, diluting existing shareholders. The founders' effective ownership drops by the option pool percentage before the investor's money even comes in.
Frequently asked questions
How much dilution is normal per round?
Seed: 15-25%. Series A: 15-25%. Series B: 10-20%. Later rounds: 5-15%. These are ranges. The actual dilution depends on valuation, round size, and option pool requirements. Total dilution across all rounds before IPO is typically 60-75% for founders.
Can you avoid dilution?
Only by not raising capital or by raising revenue-based financing and debt. Equity financing always dilutes existing shareholders. The goal is not to avoid dilution but to ensure each round creates enough value to more than offset the ownership reduction.
Related terms
The estimated worth of a company, determined during a funding round by negotiation between founders and investors.
A spreadsheet or tool that tracks who owns what percentage of a company, including founders, investors, and employees with stock options.
Ownership in a company represented by shares of stock, which entitle the holder to a proportional share of the company's value.
A non-binding document outlining the key terms of an investment, including valuation, board seats, and investor rights.
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