Understanding Dilution: How Your Equity Shrinks with Each Round
You own 50% of your startup at seed. After Series A, you own 37%. After Series B, 21%. This isn't a scam—it's how fundraising works. But understand the math so you don't get surprised.
Quick Definition
Equity dilution is the reduction in ownership percentage that occurs when a company issues new shares. Each funding round creates new shares for investors, reducing existing shareholders' percentage ownership—even though their number of shares stays the same.
You raise a $2M Series A on a $8M pre-money valuation. Post-money is $10M. The Series A gets 20% of the company ($10M × 20% = $2M). You started with 100% of nothing. Now you have 80% of $10M.
Mathematically, your ownership went from 100% to 80%. But your stake in a real company worth $10M is worth way more than 100% of a worthless idea. That's the point of fundraising.
But dilution compounds. After Series B, you're down to maybe 50-60%. After Series C, maybe 35-40%. Understand this pattern so you plan accordingly.
Dilution Is Normal
Dilution happens because you're raising capital. Every round, new shareholders own a piece. As long as the company value grows faster than your ownership shrinks, you're winning.
The Dilution Formula
Basic dilution math:
Your new ownership % = Your shares ÷ Total shares after funding
Example:
- You have 1,000,000 shares (100% at seed)
- Series A: $2M on $8M pre (raises capital for 250K new shares at $8/share)
- Total shares after: 1,000,000 + 250,000 = 1,250,000
- Your ownership: 1,000,000 ÷ 1,250,000 = 80%
- Dilution: 20% (you lost 20 percentage points)
The Compounding Effect
Where dilution gets scary is when you raise multiple rounds:
Full lifecycle example:
- Seed: You own 100%. No dilution.
- Series A ($2M, $8M pre): You own 80%. Diluted 20%.
- Series B ($5M, $15M pre): New investors get 25% ($5M ÷ $20M post). You now own: 80% × 75% = 60%. Diluted another 20%.
- Series C ($10M, $30M pre): New investors get 25% ($10M ÷ $40M post). You now own: 60% × 75% = 45%. Diluted another 15%.
- Final state: You started with 100%, you end with 45%. But the company is worth $40M, not the idea was worth $0.
Each round, the same percentage (25% in this example) looks less dilutive on paper, but compounds to bigger percentage drops.
Watch for Down Rounds
If you raise a down round (lower valuation than previous), dilution accelerates because the new investors get the same percentage but pay less. This is devastating for founders.
How Much Dilution Is Acceptable?
General benchmarks:
Per Round
15-25% dilution per round is normal. Series A: 20% dilution. Series B: 20% dilution. Series C: 20% dilution. Total by Series C: founder owns ~40-50%.
Option Pool Dilution
The option pool (equity reserved for employees) is often NOT included in "dilution" calculations, but it should be. If you expand the option pool at Series A from 10% to 20%, that's another 10% dilution to founders.
By Series
- After Series A: Founder owns ~75-85% (15-25% diluted)
- After Series B: Founder owns ~55-75% (30-45% total dilution)
- After Series C: Founder owns ~35-55% (45-65% total dilution)
If you're below these percentages, either: 1) Your Series A raised a lot (good), or 2) Your option pool is too large (bad), or 3) You've had multiple down rounds (very bad).
Dilution Is Worth It
You own 50% of a $100M company = $50M. Or you own 100% of a $5M company = $5M. The dilution wins every time if the company scales.
Anti-Dilution Protection (Down Round Protection)
Series A investors often get anti-dilution protection: if you raise a down round, they get extra shares to maintain their ownership %.
Broad-Based Anti-Dilution
Your Series A ownership is protected if later rounds are at lower price. You get extra shares to compensate. This dilutes founders MORE in down rounds.
Example Down Round with Anti-Dilution
- Series A: $2M at $8/share (investor gets 250K shares at $8)
- Series B down round: $3M at $4/share (new investor gets 750K shares)
- Without anti-dilution: Series A investor owns 250K ÷ (1,250,000 + 750,000) = 12.5%
- With anti-dilution: Series A investor gets extra shares to maintain original stake. Founders get crushed with massive dilution.
This is why down rounds are catastrophic. Investors are protected; founders are not.
Need help modeling dilution?
Understanding dilution helps you make smarter fundraising decisions. At Eagle Rock CFO, we help founders model multiple funding scenarios and understand the long-term impact on their ownership.