Fundraising
Dilution
Dilution is the reduction in existing shareholders' ownership percentage when a company issues new shares, typically during fundraising or when expanding the option pool.
Also known as: dilution, equity dilution
Why it matters
Every time you raise money or grant equity, your slice of the pie gets smaller, even though the pie may be growing. Dilution is not inherently bad: owning a smaller share of a much more valuable company is the whole point of raising. The danger is unintentional or excessive dilution from raising too often, at low valuations, or without modeling the cumulative effect across rounds.
Formula
New ownership percent = old shares / (old shares + newly issued shares).
Worked example
You own 1,000,000 of 1,000,000 shares (100 percent). The company issues 250,000 new shares to investors. You now own 1,000,000 / 1,250,000 = 80 percent.
Common mistakes
- Raising more than you need and diluting yourself for cash you will not use.
- Ignoring that option pool top-ups dilute founders too.
- Optimizing for a high valuation at all costs instead of sensible ownership over time.
Frequently asked questions
What is dilution?
The reduction in existing shareholders' ownership percentage when a company issues new shares, usually during fundraising or option pool expansion. You own a smaller slice, though the company may be worth more.
How do you calculate dilution?
New ownership equals your old shares divided by the new total shares. Issue 250,000 new shares on top of 1,000,000 and a full owner drops to 80 percent. The bigger the issuance, the more dilution.
Is dilution bad?
Not inherently. Owning a smaller share of a much bigger company is the point of raising. Dilution becomes a problem only when it is excessive, unplanned, or at low valuations. Manage it, do not fear it.
How much dilution is normal per round?
Founders commonly give up roughly 15 to 25 percent in a priced round, though it varies widely. Multiple rounds and option pools compound. Model the cumulative effect, not just one round.
How do you minimize dilution?
Raise only what you need, at fair valuations, and avoid raising too often. Strong traction lets you raise less for more. Every unnecessary dollar raised costs you ownership.
Do option pools cause dilution?
Yes. Creating or expanding an option pool issues new shares, which dilutes existing holders, usually founders. Investors often require the pool before a round, so founders absorb it. Negotiate the size deliberately.
Related terms
More in Fundraising
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Last updated 2026-06-02 · Back to the glossary