Dilution

When new shares are issued, existing shareholders own a smaller percentage of the company than before.

Example

You own 100%. You raise a round in which the investor receives 20%. You now own 80%.

Important

Dilution does NOT automatically mean you lost money. Owning 80% of a company worth $5M beats owning 100% of one worth $500k. What matters is whether the value created exceeds the percentage given up.

Related terms

• Cap table — The record of who owns what part of the company — founders, employees, option pool and investors.
• Valuation — The agreed price of the whole company, used to work out what percentage an investment buys.
• Post-money valuation — Pre-money plus the new money. The value of the company immediately after the round closes.
• Option pool — Shares set aside to grant to future employees.
• Equity — Ownership in the company, usually held as shares.

Lessons that explain it

• Debt and non-dilutive funding — Venture debt, revenue-based financing, grants and invoice finance. Money that does not cost equity — and does cost something else. (12 min)
• What an IPO actually is — Advanced and far away. A financing event that turns your company into a public one, with everything that entails. (10 min)
• Should you raise money at all? — Raising is not an achievement, it is a transaction. The first question is whether you need it, and most founders skip it. (12 min)
• Valuation, pre-money and post-money — The most confused pair of words in fundraising, and the arithmetic that decides what you own afterwards. (12 min)
• Dilution — what you actually give up — Owning less of more can be better than owning all of little. But only if you know which one is happening. (12 min)
• Reading a cap table — Who owns what, in what class, and what happens when the next round lands. (12 min)

All 176 terms in the Founder glossary