EQUITY DILUTION
New shares change the percentages.
Your share count stays the same. The total share count grows when the company issues shares to investors or an option pool.
THE MATH
Work out the price per share first.
Divide pre-money valuation by fully diluted shares. Then divide the investment by that price.
EXAMPLE
A $1M raise at a $5M pre-money valuation
The post-money valuation is $6M. The new investor owns 16.67%. A founder who owned 60% before the round owns 50% after it.
- Investor ownership
- 16.67%
- Founder before
- 60%
- Founder after
- 50%
OPTION POOL
When you add the pool matters.
A pre-money pool dilutes existing holders first. A post-money pool dilutes everyone.
Pre-money poolExisting holders are diluted before the investor enters
Post-money poolEvery holder is diluted by the added pool
Fully diluted sharesInclude granted options in the starting total
QUESTIONS
Equity dilution questions
How is equity dilution calculated?
Your ownership after a priced round equals your current ownership multiplied by the pre-money valuation divided by the post-money valuation. The post-money valuation is the pre-money valuation plus the new investment.
What is the difference between pre-money and post-money valuation?
Pre-money is the agreed value before new capital enters. Post-money is the value after it enters. A $5 million pre-money round with $1 million invested has a $6 million post-money valuation.
Do founders lose shares when they are diluted?
Usually no. Founders keep the same number of shares, but the company issues new shares to investors or an option pool. Their percentage becomes smaller because the total number of shares increases.
Why does an option pool affect founder dilution?
An employee option pool creates shares for future hires. If it is created before a funding round, existing holders absorb that dilution before the investor enters. Its placement is a meaningful term to understand in a financing offer.
Does dilution compound across funding rounds?
Yes. Each round reduces the ownership percentage that remains after the previous round. Keeping 80% after one round and then 80% after the next leaves you with 64% of the original stake.