Equity & dilution
How startup dilution works
Dilution happens when a company issues new shares: your share count stays the same, the total grows, so your percentage falls. It is not a loss of value in itself — a smaller slice of a larger company is often worth more — but it is permanent, it compounds across rounds, and a surprising amount of it comes from option pools and converting SAFEs rather than the investor's cheque.
Prepared by Perseids · Published · Updated
The mechanic in one line
Ownership after = your shares ÷ (fully diluted shares + new shares issued). Nothing is taken from you; the denominator grows. That is why dilution is expressed in percentage points, and why the same round dilutes every existing holder in proportion.
A worked example
A company has 9,500,000 fully diluted shares. A founder holds 4,000,000 of them: 42.1%. The company raises 4,000,000 at a 16,000,000 pre-money valuation. The price per share is 16,000,000 ÷ 9,500,000 = 1.684, so the investor receives about 2,375,000 shares and the post-round total is 11,875,000. The founder's 4,000,000 shares are now 33.7% — 8.4 percentage points of dilution for a 20% round.
Add a pre-money increase to a 10% post-round option pool and roughly 1,000,000 further shares are created before pricing. The investor still gets 20%; the founder lands near 30.3%. The pool, not the investor, took the extra three points.
The four sources of dilution
| Source | Who absorbs it | How to control it |
|---|---|---|
| Priced round | All existing holders proportionally | Raise what the plan needs, negotiate the pre-money |
| Option pool increase | Existing holders, if created pre-money | Size it from a hiring plan; push for post-money treatment |
| SAFE / note conversion | Existing holders at the round | Watch cumulative caps before stacking instruments |
| Warrants | All existing holders on exercise | Track them; they are routinely forgotten until exit |
Priced round
- Who absorbs it
- All existing holders proportionally
- How to control it
- Raise what the plan needs, negotiate the pre-money
Option pool increase
- Who absorbs it
- Existing holders, if created pre-money
- How to control it
- Size it from a hiring plan; push for post-money treatment
SAFE / note conversion
- Who absorbs it
- Existing holders at the round
- How to control it
- Watch cumulative caps before stacking instruments
Warrants
- Who absorbs it
- All existing holders on exercise
- How to control it
- Track them; they are routinely forgotten until exit
What dilution does not do
- It does not reduce your share count.
- It does not, by itself, reduce the value of your holding.
- It does not apply to a pure secondary sale, where shares change hands but none are created.
- It does not affect holders differently unless a specific term — anti-dilution, a pre-money pool — says so.
Prepared by Perseids for general information. It is not legal, tax or investment advice — confirm your specific situation with your advisers.
Frequently asked questions
- Is 20% dilution per round normal?
- Selling 15–25% in a priced round is a common shape. Founder dilution is usually higher than the headline because pool increases and converting instruments land in the same transaction.
- Can I protect myself from dilution?
- Founders rarely have anti-dilution protection; investors often do. The practical levers are the amount raised, the valuation, the size and treatment of the pool, and how many convertibles are outstanding before a priced round.
Put this into practice with Perseids.
Model this on your actual cap table