Dilution is the reduction in existing shareholders' ownership percentage that happens when new shares are created, typically through fundraising rounds, option pool expansions, or SAFE and convertible note conversions. Dilution is a normal part of startup growth. The goal is to make sure each dilutive event increases the total value of the company by more than the ownership percentage given up, so each shareholder's slice is worth more even though it is smaller.
Every time new shares are created, whether through fundraising, option pool expansion, or SAFE conversion, existing shareholders own a smaller percentage of the company.
Dilution is normal and expected. The goal is to make sure the value of your smaller slice grows faster than the slice itself shrinks, which is exactly what a good fundraise should do.
Fundraising rounds create new shares issued to investors, typically representing 15 to 25 percent of the company per round.
Option pool expansion often happens right before a round at the investor's request, diluting existing shareholders before the new money even comes in.
SAFE and convertible note conversion turns deferred equity into shares at the priced round, on top of whatever dilution the round itself causes.
Secondary sales and warrant exercises can also create additional dilution, though these are less common at early stages.
Typical per-round dilution runs 15 to 25 percent at Seed, 15 to 25 percent at Series A, and 10 to 20 percent at Series B.
After Seed, Series A, and Series B, founders often own 30 to 45 percent combined. With aggressive fundraising or a lot of outstanding SAFEs, this can end up lower.
Founders start owning 100 percent. At Seed, they sell 20 percent for $2 million, leaving founders at 80 percent.
At Series A, they sell another 20 percent for $8 million. Founders now own 80 percent times 80 percent, or 64 percent. With a 10 percent option pool expansion built into the Series A, founders end up around 54 percent.
Not modeling cumulative dilution across rounds. Each round compounds on top of the last, so a series of individually reasonable rounds can add up to much more dilution than founders expect.
Forgetting SAFE conversion dilution. Multiple SAFEs at different caps can surprise founders at conversion if nobody has been tracking cumulative ownership.
Not negotiating option pool size. The pool expansion is effectively a valuation haircut that comes straight out of the founders' side.
Dilution is not usually shown directly in the deck itself. Keep a clean, up-to-date cap table model ready for due diligence that shows current ownership and pro forma ownership after the round closes.
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