Equity & dilution

How to model dilution in a startup funding round

To model dilution in a priced round, compute the post-money valuation, decide whether the option pool is created pre-money or post-money, convert any outstanding SAFEs and notes, then divide each holder's shares by the new fully diluted total. Dilution is the change in that percentage — not the change in the number of shares a holder owns, which usually does not move at all.

Prepared by Perseids · Published 2026-08-18 · Updated 2026-08-18

The five steps

1. 1Start from the current fully diluted share count, including the existing pool.
2. 2Set the round: pre-money valuation and amount raised. Post-money = pre-money + amount raised.
3. 3Decide pool treatment. A pre-money pool increase is absorbed by existing holders; a post-money pool is shared with the new investor.
4. 4Convert SAFEs and notes at their own terms — cap, discount, accrued interest — using the round price.
5. 5Recompute every holder's percentage against the new fully diluted total.

Worked example

Pre-round fully diluted: 9,500,000 shares. The round is 4,000,000 at 16,000,000 pre-money, so post-money is 20,000,000 and the investor takes 20%. With no pool change and no convertibles, the price per share is 16,000,000 / 9,500,000 = 1.684, and the investor receives about 2,375,000 shares for a post-round total of 11,875,000. A founder with 4,000,000 shares moves from 42.1% to 33.7%.

Now add a pre-money pool increase to 10% post-close. The new pool shares are created before the money arrives, so they come out of the existing holders' side. The same founder lands closer to 31% rather than 33.7% — with an identical headline valuation.

What people get wrong

• Modelling on outstanding shares instead of fully diluted.
• Forgetting that a pre-money pool is founder dilution, not shared dilution.
• Treating SAFEs as if they convert at the round price when a cap applies.
• Ignoring accrued interest on notes.
• Assuming pro rata participation without checking who actually has the right and the cash.

Prepared by Perseids for general information. It is not legal, tax or investment advice — confirm your specific situation with your advisers.