You started your company with 100% ownership. After seed, you're at 75%. After Series A, 55%. After Series B, 38%. This is dilution—and it's one of the most misunderstood aspects of startup finance.

Dilution isn't necessarily bad. A smaller piece of a bigger pie can be worth far more than a large piece of a tiny pie. But understanding the math helps you make better decisions about fundraising.

What is Dilution?

Dilution occurs when a company issues new shares, reducing existing shareholders' percentage ownership. If you owned 50% of a company with 1 million shares (500,000 shares), and the company issues 500,000 new shares to investors, you still own 500,000 shares—but now that's 33.3% of 1.5 million total shares.

Your share count didn't change. The total share count did. Your percentage dropped.

The Basic Dilution Formula

Post-Round Ownership = Pre-Round Ownership × (1 - Dilution Percentage)

Or calculated directly:

Dilution = Investment Amount / Post-Money Valuation

Founder Ownership After Round = Pre-Round Ownership × (Pre-Money / Post-Money)

Example

You own 80% before a Series A. You raise $4M at $16M pre-money ($20M post-money).

Dilution = $4M / $20M = 20%

Your new ownership = 80% × (1 - 20%) = 64%

Or: 80% × ($16M / $20M) = 64%

Dilution Through Multiple Rounds

Let's track a typical founder through several rounds:

Starting Point

• Founder ownership: 100%
• Shares: 10,000,000

Friends & Family ($200K at $1M post)

• Dilution: 20%
• Founder: 100% × 0.80 = 80%

Seed Round ($1M at $5M post)

• Dilution: 20%
• Founder: 80% × 0.80 = 64%

Option Pool (10% created pre-Series A)

• Effective dilution: 10%
• Founder: 64% × 0.90 = 57.6%

Series A ($5M at $25M post)

• Dilution: 20%
• Founder: 57.6% × 0.80 = 46.1%

Option Pool Refresh (5% added pre-Series B)

• Founder: 46.1% × 0.95 = 43.8%

Series B ($15M at $75M post)

• Dilution: 20%
• Founder: 43.8% × 0.80 = 35.0%

After raising ~$21M across rounds, the founder owns 35% of a $75M company—worth $26.25M. That's significantly better than 100% of a company worth $0.

The Option Pool Shuffle

Option pools are often the hidden source of founder dilution. VCs typically require an option pool be created (or expanded) *before* their investment, meaning it dilutes existing shareholders only.

How It Works

VC: "We'll invest at $10M pre-money, but you need a 15% option pool first."

What this really means:

• Your "effective" pre-money is $10M - $1.5M pool = $8.5M
• The announced dilution understates your actual dilution

Example Comparison

That 15% pool came entirely from founders, not investors.

Negotiating Option Pools

1. Size appropriately: Push for a pool sized to your 18-24 month hiring plan, not arbitrary percentages

2. Use existing pool: If you already have unused options, negotiate to count them

3. Post-money pools: Ask for the pool to come from post-money (shared dilution)—harder to get but worth trying

Anti-Dilution Provisions

VCs protect themselves from dilution with anti-dilution clauses in term sheets. The two main types:

Full Ratchet

If the company raises a "down round" (lower valuation), earlier investors get repriced as if they invested at the new lower price. This can devastate founders.

Weighted Average (More Common)

Adjusts earlier investors' price based on how much was raised in the down round and at what price. Less punitive than full ratchet.

These provisions protect investors if your valuation drops. They don't protect founders.

What Dilution Means for Exit Proceeds

Here's where it gets real. At exit, your ownership percentage determines your payout.

Exit at $100M (Simplified)

Using our example founder at 35% ownership:

• Gross proceeds: $100M × 35% = $35M
• Less: liquidation preferences (if any)
• Less: taxes

Exit at $500M

• Gross proceeds: $500M × 35% = $175M

Exit at $1B

• Gross proceeds: $1B × 35% = $350M

At meaningful exit sizes, 35% of a large outcome far exceeds 80% of a small one.

When Dilution Matters Most

Early Rounds

Seed dilution is the most expensive because:

1. You give up equity when the company is cheapest

2. That dilution compounds through every future round

Giving up 25% at seed versus 20% means 5% less ownership *forever*—multiplied through every subsequent round.

Before You Have Leverage

When you're desperate for cash, you take worse terms. When multiple VCs want in, you get better valuations and less dilution.

Option Pool Increases

Every pool expansion pre-financing costs founders. Budget options carefully and top up pools strategically, not excessively.

How to Minimize Unnecessary Dilution

1. Bootstrap Longer

Every month of revenue before raising improves your negotiating position. Higher traction = higher valuation = less dilution.

2. Raise What You Need

Over-raising means over-diluting. Calculate your runway requirements carefully and resist the temptation to "take the money while it's there."

3. Negotiate Hard on Option Pools

Don't accept inflated pool requirements. Push back with a detailed hiring plan showing exactly what options you need.

4. Consider Alternative Financing

Revenue-based financing, venture debt, or grants don't dilute equity. They're not always appropriate, but consider them.

5. Hit Milestones Before Raising

The single best way to minimize dilution is to raise at a higher valuation. Achieve the metrics that justify that valuation before going to market.

The Dilution Mindset Shift

New founders obsess over percentage ownership. Experienced founders think about value creation.

Wrong question: "How do I keep the most equity?"

Right question: "How do I maximize the value of my equity?"

Key realization: 10% of a $1B company ($100M) beats 60% of a $50M company ($30M).

Take the dilution that enables you to build something massive. Avoid the dilution that doesn't meaningfully accelerate your company.

Key Takeaways

• Dilution = Investment Amount / Post-Money Valuation
• Each round compounds—early dilution affects you forever
• Option pools created pre-financing dilute founders, not investors
• A smaller percentage of a bigger outcome is usually better
• Bootstrap longer, raise what you need, and negotiate pool sizes
• Focus on value creation, not just ownership percentage

Dilution is the price of growth capital. Understanding the math helps you pay a fair price—not an excessive one—while building a company valuable enough that your reduced percentage is worth far more than where you started.