Deal Terms
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Quick Answer
The reduction in an existing shareholder's ownership percentage when new shares are issued, typically during a funding round.
Equity dilution occurs when a company issues new shares, reducing the percentage ownership of existing shareholders. If a founder owns 100% of 1 million shares and the company issues 250,000 new shares to investors, the founder's ownership drops from 100% to 80% (1M / 1.25M). Dilution is a fundamental trade-off in startup financing: founders give up ownership percentage to bring in capital that (ideally) makes their remaining percentage worth more in absolute terms. Typical dilution per round: 15-25% at pre-seed/seed, 15-20% at Series A, 10-15% at Series B and beyond. A founder who raises Pre-Seed through Series C typically retains 15-25% ownership.
Why It Matters
Every founder needs to understand dilution math because it directly determines how much of the company they own at exit. A founder with 20% of a $1B company has $200M — but getting to that outcome typically requires 4-5 rounds of dilution. The key insight: dilution is acceptable when the capital raised makes the total pie much bigger.
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Equity dilution occurs when a company issues new shares, reducing the percentage ownership of existing shareholders. If a founder owns 100% of 1 million shares and the company issues 250,000 new shares to investors, the founder's ownership drops from 100% to 80% (1M / 1.25M).
Understanding Equity Dilution is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Equity Dilution falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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