Dilution

How it works

Every funding round dilutes existing shareholders proportional to how many new shares are issued. A founder who owns 50% of a company before a Series A that gives investors 20% will own 40% after (50% × (1 − 20%) = 40%). Pro-rata rights, employee option pools, and SAFE conversions all add dilution. Founders typically end up owning 10–25% of their company by the time it IPOs, after multiple rounds.

Related terms

• Pre-money valuation
  Pre-money valuation is what a company is worth before the new investment is added — used to calculate how much of the company the new investors are buying.
• Post-money valuation
  Post-money valuation is what a company is worth after the new investment is added (pre-money + the amount raised).
• Pro-rata rights
  Pro-rata rights give an existing investor the right (but not the obligation) to maintain their ownership percentage by buying their share of any new financing.
• Option pool (ESOP)
  An option pool is a reserved allocation of equity (typically 10–20% of the company) set aside to grant to current and future employees as stock options.
• SAFE (Simple Agreement for Future Equity)
  A SAFE is a short investment contract that gives an investor the right to receive shares in a future priced round, without setting a valuation today.