Key takeaways
- New ownership = your shares divided by the new total shares.
- Option pools created before a round dilute existing holders only.
- Pro rata rights let an investor buy into a round to limit its dilution.
How dilution is calculated
Divide the shares you hold by the total shares after the new issue. A founder holds 4,000,000 of 10,000,000 shares: 40 percent. The company issues 2,500,000 new shares to investors. The founder still holds 4,000,000, now of 12,500,000: 32 percent. The founder's stake fell by 8 percentage points, or 20 percent of what they had.
Common sources of dilution
- A priced round, where new investors buy newly issued shares.
- An option pool created or topped up, often required before a round so that only existing holders bear it.
- SAFEs and convertible notes converting at the next priced round.
- Warrants or advisor grants, which are small one by one but add up.
Dilution in a fund's process
A fund models dilution twice: for the founders, to check they keep enough ownership to stay motivated, and for itself, to see what its stake looks like after the next two rounds. That is where pro rata rights and reserves for follow-on investment come in.
Common confusions
- Dilution versus loss: 32 percent of a company worth more can be worth more than 40 percent before.
- Anti-dilution protection adjusts an investor's conversion price in a down round. It does not stop ordinary dilution.
- Percentage points versus percent: a drop from 40 to 32 percent is 8 points, but a 20 percent reduction.