Dilution.
aka equity dilution, ownership dilution
Your slice gets smaller every time the company sells new slices.
What it actually means
Dilution is the drop in your ownership percentage when a company issues new shares to investors or employees. You still hold the same number of shares, but they are now a smaller share of a bigger total.
It is arithmetic, not theft. If you hold 100 of 1,000 shares, you own 10%. The company sells 250 new shares to an investor; now there are 1,250 shares and your 100 is 8%. You were diluted by two points.
The twist that confuses everyone: dilution can make you richer. If those 250 shares were sold at a price that values the company at twice what it was, your 8% is worth more than your 10% was. Founders usually end up with 10–20% of their company at IPO and are fine with it, because 15% of something large beats 50% of something that never got funded. Dilution is only bad when the new money does not make the company more valuable.
Where you'll hear it
We are proposing $8M at $32M pre, so the round is 20% dilution to existing holders, and we would want the option pool topped up to 10% post-money.
Translation: everyone’s percentage drops by a fifth, and the pool top-up means the founders drop a bit more than the investors. Welcome to term sheets.
You will hear it in every funding conversation, in option grant letters (“subject to dilution from future financings”), and from employees doing maths on their equity after a big round. It is also the quiet reason founders argue about round size: more money now means a smaller share later.
The pop-culture version
When it was four of you, each person was a quarter of the conversation. Every plan needed your yes. Then someone added their cousin, then a work friend, then the cousin’s roommate. You still send the same number of messages; you are just a smaller share of the chat.
That is dilution. Nobody took your messages away. The total got bigger around you. Whether that is good depends on who joined: if the new people bring a car, a flat with a rooftop and someone who can cook, the chat is better and you are glad to be 7% of it. If they bring nothing, you have been diluted for no reason.
Investors who bring money, advice and introductions are the car and the rooftop. Investors who bring only money at a low valuation are the cousin’s roommate. Founders spend a lot of time trying to tell the difference before signing.
Say it like you mean it
“The round dilutes us 20%, but the post-money is 2.5x the last round, so our stake is worth more.”
Both halves of the story: the percentage drop and the value change.“They took 20% of my company.”
Nobody took anything. The company sold new shares. Framing it as a loss misses the point of raising money.Also worth knowing: “anti-dilution” clauses protect investors, not founders, when a later round is priced lower than theirs. If you see one in a term sheet, ask what kind (“broad-based weighted average” is normal; “full ratchet” is aggressive).
How option pools and funding rounds dilute founders, with the pre-money pool shuffle explained step by step.
Decoded next
Decoded by the Kurums editorial team. Kurums Decoded translates the language of business for people who are new to it. Definitions are kept short on purpose; the serious version above goes deep. Nothing here is financial, legal or career advice.
Discover more from Kurums | Business Intelligence
Subscribe to get the latest posts sent to your email.