Dilution

Dilution is the reduction in an existing shareholder’s ownership percentage when a company issues additional shares or securities that convert into shares. If a founder owns 60 percent before a financing and the new investors receive 20 percent of the post-money company, the founder’s percentage falls even though the number of founder shares may not change.

Financing is not the only source of dilution. Increasing the employee option pool, converting SAFEs or notes, issuing acquisition consideration, and granting warrants can all change ownership. The economic question is whether the capital or talent acquired increases the company’s value enough to justify the smaller percentage. Founders should model a round on a fully diluted basis and understand whether the option pool is added before or after the investment, because that timing affects who bears the dilution. Decks usually present the amount being raised and milestones rather than ownership math, but a clean cap table and a transparent model are essential during diligence.