Dilution
The reduction in existing shareholders' ownership percentage when new shares are issued in a fundraising round.
Dilution occurs whenever a company issues new shares, reducing the ownership percentage of existing shareholders. If a founder owns 100% of a company and sells 20% to an investor, the founder has been diluted to 80%. Dilution is a natural and expected part of startup growth: founders trade ownership for capital that helps the company become more valuable.
There are two types of dilution to understand. Percentage dilution is the reduction in ownership percentage. Economic dilution occurs when shares are sold below their fair value, actually reducing the value of existing shares. In a healthy fundraise, founders experience percentage dilution but not economic dilution, because the company's increased valuation means their smaller percentage is worth more in absolute terms.
Typical dilution per round ranges from 15-25% at seed stage, 15-20% at Series A, and 10-15% at later stages. By the time a startup reaches an exit, founders typically retain 10-25% of the company. Understanding dilution is critical for founders because it affects their control, economics, and ability to raise future rounds.
Example
A founder owns 80% after a seed round. In the Series A, the company sells 20% to new investors. The founder is diluted from 80% to 64% (80% x 80%). If the company was worth $5M after seed and is now worth $25M after Series A, the founder's 64% is worth $16M, up from $4M despite the dilution.
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