Dilution

The reduction of an owner's percentage when new shares are issued. Dilution happens during fundraising, when expanding an option pool, or when converting notes or SAFEs. A smaller percentage of a larger pie can still be worth more.

Why it matters

Every time you issue new shares, existing owners get diluted. Understanding dilution is essential for making informed decisions about fundraising, hiring, and option grants. The goal is not to avoid dilution entirely but to ensure each round of dilution increases the value of what you still hold.

How it works

If you own 50% of a company with 1 million shares (500,000 shares) and the company issues 500,000 new shares to investors, the total becomes 1.5 million shares. Your 500,000 shares now represent 33% instead of 50%. You still own the same number of shares, but your percentage dropped. The key insight: dilution is normal and expected. What matters is whether the value per share increases faster than your percentage decreases. Owning 33% of a $30M company is worth more than 50% of a $5M company.

Learn more

• SAFE Notes Explained
• Employee Equity Benchmarks
• What Is a Cap Table

Related terms

• Anti-Dilution
• Cap Table
• Option Pool
• Pro-Rata Rights