Dilution

Dilution occurs whenever new shares are created, reducing each existing shareholder's proportional ownership. If a founder owns 100 % of 1 million shares and issues 250,000 new shares to an investor, the founder's ownership drops to 80 % (1M ÷ 1.25M). Dilution is not inherently bad; it is the mechanism by which companies trade ownership for capital to grow faster.

Typical dilution per round follows predictable patterns: pre-seed rounds dilute founders by 10–15 %, seed rounds by 15–25 %, Series A by 20–30 %, and each subsequent round by 15–25 %. After several rounds plus an employee option pool (typically 10–20 %), founders commonly retain 15–30 % ownership at IPO. The key metric is not dilution percentage alone but whether each round increases the total value of the founder's remaining stake.

Anti-dilution provisions in term sheets protect investors from future down rounds by adjusting their conversion price. Full ratchet anti-dilution is the most aggressive form (rare today), while weighted average anti-dilution is standard. Founders should carefully negotiate these terms because they determine how much additional dilution occurs if the company raises at a lower valuation in the future.