What causes dilution and how does it work?
Founders typically encounter a 10% - 25% dilution at the seed funding stage.
Series A round sees dilution ranges between 20% - 30%, coinciding with the company’s growth.
Series B sees dilution ranges between 15% - 30%.
Later stages of dilution vary based on the company's needs and valuations.
Grasp the concept of dilution to make informed fundraising decisions.
What causes dilution?
Capital raising
Expansion of employee stock options
Initial public offerings (IPOs)
These events result in the issuance of new shares, spreading ownership across more individuals.
How does dilution work?
Let’s say a sole founder starts with 8,000 shares, representing 100% of the startup.
They create a 500-share employee option pool and issue 1,500 shares to investors.
There are now 10,000 total shares, and the founder's ownership is 80%.
That’s dilution.
SAFE Notes (Simple Agreement for Future Equity): Secure funding now for shares in the future.
This delays dilution until a priced round, where ownership percentages are recalculated.
Pre-money SAFEs result in simultaneous dilution for all shareholders.
Meanwhile, post-money SAFEs initially dilute only the founders upfront.
Startups exchange shares for capital based on a pre-established valuation in price rounds.
For example, a $1M investment into a $4M pre-money valuation leads to 80% founder ownership post-investment.
But at $4M post, the founder only owns 75%.
How to minimize dilution?
Founders should be careful not to overraise capital beyond what's required to reach the next milestone.
Model out various scenarios.
Looking to minimize dilution?
Refrain from raising too much capital l beyond what’s needed to hit your set of next milestones.
