Equity Dilution
The reduction in existing shareholders' ownership percentage when new shares are issued.
Definition
Equity dilution occurs when a company issues new shares — to raise capital, create an option pool, or compensate employees — reducing the percentage ownership of all existing shareholders. Dilution is not inherently bad: raising capital at a higher valuation means founders own a smaller percentage of a larger pie. What matters is whether the value of your ownership stake increases in absolute terms.
Why It Matters
Understanding dilution helps founders model their stake across multiple funding rounds. Excessive dilution at early stages can leave founders with insufficient equity to stay motivated or to attract co-founders and key hires. Option pool shuffles — requiring a new option pool before closing a round — are a common source of unexpected founder dilution.
Example
You own 60% of your company. After a seed round that creates 20% new shares, your stake dilutes to 60% × (1 − 0.20) = 48%.