Today's percentage is not what you will hold at an exit. Projecting future rounds and pool top-ups gives a realistic ownership figure and a much better sense of what an outcome would return.
12 min read · Level 3
Almost every early-stage return estimate I have seen from individual investors uses today's ownership percentage, which makes every opportunity look better than it is. Running the dilution forward takes two minutes and typically cuts the projected outcome roughly in half. That is not pessimism; it is the arithmetic of how companies get funded.
An investor who owns 5% after a seed round will not own 5% at exit. Each subsequent round and pool top-up reduces it.
A projection for a company expected to raise three more rounds:
Round Share sold (including pool top-up) Ownership after Now - 5.00% Series A 20% 4.00% Series B 20% 3.20% Series C 15% 2.72%
The investor's 5% becomes 2.72% - a 46% reduction - without anything going wrong. At a 300,000,000 exit:
2.72% x 300,000,000 = 8,160,000
If the investment was 250,000, that is about 32.6x before any preferences are applied.
The same model shows what pro-rata participation would change, and what happens if the company raises more rounds than expected. Companies that need five rounds instead of three dilute early holders considerably more, even when the outcome is good.
Projections should stay rough. The purpose is to avoid the error of treating today's percentage as permanent, not to predict the exact path.
Because expected returns computed on current ownership are systematically too high. An investor comparing opportunities on today's percentages will overestimate every early-stage position.
It also informs reserve planning. Seeing ownership fall from 5% to 2.72% makes the value of follow-on capital concrete rather than theoretical.
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.
Two paths for the same seed investment of 250,000 for 5%.
Path Rounds to exit Ownership at exit Exit value Proceeds Efficient 3 rounds 2.72% 300,000,000 8,160,000 Capital hungry 5 rounds about 1.74% 300,000,000 about 5,220,000
The second path assumes two further rounds each selling 20%: 2.72% x 0.8 x 0.8 = about 1.74%. Same exit value, same company, about 2,940,000 less for the early investor because the business needed more capital to get there.
Estimating returns using current ownership without modelling the dilution from rounds the company still needs to raise.
Based on the company's capital needs and stage, assume a realistic number of future financings.
Use 15% to 25% per round including pool top-ups unless you have better information.
Apply each round's retained share in sequence to find projected ownership.
Add one or two extra rounds and see how much your ownership and proceeds fall.
Use the waterfall from the exits lessons to convert ownership into proceeds.
When evaluating an early-stage investment or estimating what an existing position might return.
Do not present these projections as forecasts. They are a way of avoiding an obvious error, not a prediction of the financing path.
Angel investors frequently describe seed positions falling to a small fraction of their original percentage by the time a company exits, particularly in capital-intensive businesses that raised many rounds, even where the outcome was strong.
Capital intensity is a dilution forecast. Businesses that need many rounds reward early holders less for the same exit value.
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