Dilution is the reduction in existing shareholders ownership percentage that occurs when new shares are created, typically through fundraising rounds, option pool expansions, or SAFE/convertible note conversions. Dilution is a normal part of startup growth. The goal is to ensure that each dilutive event increases the total value of the company by more than the ownership percentage given up, so each shareholder slice is worth more despite being smaller.
Every time new shares are created (fundraising, option pool expansion, SAFE conversion), existing shareholders own a smaller percentage of the company.
Dilution is normal and expected. The goal is to ensure the value of your smaller slice grows faster than the slice shrinks.
Fundraising rounds: new shares issued to investors (typically 15-25% per round).
Option pool expansion: investors often require increasing the pool pre-round, diluting existing shareholders.
SAFE/note conversion: deferred equity that converts into shares at the priced round.
Secondary sales and warrant exercises.
Typical per-round dilution: Seed 15-25%, Series A 15-25%, Series B 10-20%.
After Seed + A + B, founders often own 30-45% combined. With aggressive fundraising or many SAFEs, this can be lower.
Founders own 100%. Seed: sell 20% for $2M. Founders now own 80%.
Series A: sell 20% for $8M. Founders now own 80% x 80% = 64%. With 10% option pool expansion pre-A, founders own ~54%.
Not modeling cumulative dilution across rounds. Each round compounds.
Forgetting SAFE conversion dilution. Multiple SAFEs at different caps can surprise at conversion.
Not negotiating option pool size. The pool expansion is effectively a valuation haircut.
Not shown directly in most decks. Have a clean cap table model ready for due diligence that shows current ownership and pro forma post-round.
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