Each funding round reduces existing holders' percentage. Dilution is not a loss in itself; it becomes one when the company's value does not rise enough to compensate, as in a down round.
12 min read · Level 3
I think the obsession with keeping ownership percentages causes more harm than dilution itself. Founders and early investors who resist good rounds to protect a percentage can starve a company of the capital it needs. The number to protect is the value of the stake, which usually depends more on the company succeeding than on how much of it you hold.
Each new round issues shares, so each existing holder's percentage falls by the share sold. If a round sells 20% of the company, everyone who does not invest keeps 80% of their previous percentage.
A founder starts with 40% and never invests further:
Round Share sold Founder % Post-money Founder stake value Start - 40.0% - - Seed 20% 40% x 0.80 = 32.0% 10,000,000 3,200,000 Series A 25% 32% x 0.75 = 24.0% 40,000,000 9,600,000 Series B 20% 24% x 0.80 = 19.2% 150,000,000 28,800,000
Ownership fell from 40% to 19.2%. The value of the stake rose from 3,200,000 to 28,800,000.
Now a down round instead: Series B happens at a post-money of 30,000,000, below Series A's 40,000,000.
Founder 19.2% of 30,000,000 = 5,760,000
The stake is worth less than after Series A, despite more capital being raised. In down rounds, anti-dilution provisions held by earlier preferred investors can give them additional shares, diluting common holders such as founders and angels even further.
Because many people treat dilution as bad by definition and resist it. Raising money on good terms that grows the company's value is the point of the exercise.
The real risk is dilution without value growth. A down round combines a lower price with more shares, and often extra protections for later investors, which can sharply reduce early holders' outcomes.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
An angel's view across the same rounds. The angel invested at seed and owns 2% after the seed round, never investing again.
Round Angel % Post-money Angel stake value Seed 2.00% 10,000,000 200,000 Series A 2.00% x 0.75 = 1.50% 40,000,000 600,000 Series B 1.50% x 0.80 = 1.20% 150,000,000 1,800,000
With pro-rata rights, the angel could have invested in Series A to keep 2%, buying 2% of that round. At a 10,000,000 raise (25% of a 40,000,000 post-money), that would cost 200,000. Whether that is wise depends on the follow-on decision, but knowing the cost is part of reading the cap table.
Judging a round by how much it dilutes you rather than by what it does to the value of your stake and the company's prospects.
For each round, compute your new percentage and multiply it by the post-money valuation.
Check whether later rounds are priced below earlier ones and whether anti-dilution provisions apply.
Multiply your ownership by the round size to see what exercising pro-rata would cost.
When a company you hold raises a new round, or when projecting outcomes for an early-stage investment.
Do not project future rounds as if valuations will always rise. Many companies raise flat or down rounds, or never raise again.
After private valuations peaked in 2021, data providers tracking venture financings reported a sharp rise in the share of down rounds in 2023, with many companies raising at lower valuations than their previous rounds or restructuring terms to avoid a lower headline price.
Stake values from the last round are not locked in. Model what a flat or down round would do to your position.
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