Dilution

Dilution reduces your ownership percentage when a company issues new shares, but it does not reduce your absolute number of shares.

If you own 10,000 shares out of 100,000 total, you own 10%. If the company issues 50,000 new shares (e.g., in a funding round), the total becomes 150,000. You still own 10,000 shares, but now that’s 6.7% of the company.

This happens:

• At each funding round (new preferred shares issued)
• When the option pool is created or expanded
• When convertibles (notes/SAFEs) convert into equity

Early employees experience more dilution over time because there are more future rounds, so they typically receive larger initial grants to compensate.

Example

You join a seed-stage startup at an $8M valuation and receive options for 1% of the fully diluted company: 1,000 shares out of 100,000.

Scenario 1: Modest exit at $50M

• Company raises:
  • Series A: $15M at a $40M valuation
  • Series B: $30M at a $120M valuation
• Each round issues new shares, diluting everyone.
• By exit, your 1,000 shares represent 0.45% of the company.
• Gross payout: 0.45% × $50M = $225,000.
• After 1x non-participating liquidation preferences to investors, your approximate net is ~$180,000.

Scenario 2: Strong exit at $200M

• Same dilution path: you still end up with 0.45%.
• Gross payout: 0.45% × $200M = $900,000.
• The math on dilution is the same; only the exit size changes.

What to Watch Out For

• Option pool refreshes dilute you even without a new funding round.
  • If the board increases the option pool from 10% to 15%, that extra 5% comes out of existing common shareholders.
• Down rounds dilute you more than up rounds.
  • Raising at a lower valuation means new investors get more ownership for the same money, so existing holders are hit harder.
• Anti-dilution protections favor preferred shareholders.
  • In down rounds, anti-dilution can adjust investors’ conversion prices, shifting more dilution onto common stock.
• Founders can issue themselves new shares later.
  • This can further dilute employees and other common holders; you need to understand the cap table and board approvals.

Related Terms

• Option Pool — Shares reserved for future hires; expanding the pool dilutes existing shareholders.
• Cap Table — The detailed breakdown of who owns what, before and after each financing.
• Pro-Rata Rights — Rights that let investors buy more in future rounds to maintain their ownership percentage.
• Anti-Dilution — Contractual protections for investors in down rounds, often increasing dilution for common.
• Preferred Shares — Investor shares with special rights (preferences, protections) that common stock usually doesn’t have.