Dilution

The reduction in your percentage ownership of a company when it issues new shares to someone else.

Example

0.1% becomes 0.0512% after three rounds each issuing 20% new equity, because 0.8 cubed is 0.512.

Important

Dilution is what success looks like from the inside - it happens because a company that is working keeps raising. It falls hardest on exactly the holdings that were going to produce your return.

Related terms

  • Pro-rata rights — A contractual right to invest enough in a future round to keep your existing percentage of a company rather than being diluted by it.
  • Follow-on investment — Investing more money into a company you already hold, usually as part of a later financing round and at a higher valuation.
  • Shareholder — Someone who owns shares, equity, in a company.

Lessons that explain it

  • Ownership at exit is ownership today multiplied by every round's dilution — An early investor's final ownership is their entry stake reduced by each later round and option pool increase. Modelling the chain shows what exit value is needed for a target return. (11 min)
  • The option pool shuffle quietly lowers the founders' real price — Post-money equals pre-money plus the new investment. But when investors require an option pool to be created inside the pre-money valuation, the existing shareholders bear its full cost. (13 min)
  • A smaller slice of a much bigger company is usually the good outcome — 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)
  • Vesting decides who keeps equity; the pool decides how much is left to give — Founder and employee shares are usually earned over time. Vesting protects the company from dead equity, and pool size determines whether it can hire without another dilutive top-up. (11 min)
  • Model the rounds between now and the exit, or your ownership estimate is fiction — 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)
  • No coupon, no rent, no earnings: the next buyer is the return — There is no income here by default and no cash flow to discount. Where a protocol does pay a yield, the useful question is not how much - it is where the money comes from, and sometimes the honest answer is other holders. (11 min)

All 578 terms in the Investing glossary