Equity Dilution
Definition
Equity dilution occurs when a company issues new shares, reducing existing shareholders' ownership percentage. Dilution happens during fundraising rounds, employee stock option grants, and SAFE/convertible note conversions. While dilution decreases percentage ownership, it ideally increases the absolute value of each stakeholder's shares.
Overview
Equity dilution is the reduction in existing owners' percentage of the company that occurs whenever new shares are created. It is an inherent part of venture-funded startup growth; founders typically dilute 15–25 % per fundraising round, plus additional dilution from employee option pools.
The key insight about dilution is that percentage ownership decreases, but the goal is for absolute value to increase. Owning 80 % of a $1M company ($800K) and diluting to 60 % of a $10M company ($6M) is a massive win. Dilution becomes problematic when it occurs without a proportional increase in company value, such as in down rounds or bridge financings at unfavorable terms.
Founders should model their cumulative dilution across multiple rounds. A typical path from founding to Series B might look like: 100 % → 80 % (seed) → 60 % (Series A) → 45 % (Series B), with additional dilution from option pools. Maintaining a clear view of projected dilution via a cap table model helps founders make informed decisions about when, how much, and at what valuation to raise.
Example
A founder owns 100 % of 1,000,000 shares. A seed round creates 250,000 new shares for investors. The founder now owns 1,000,000 ÷ 1,250,000 = 80 %, a 20 % dilution.
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