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Glossary

Dilution

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Related terms

Glossarybeginner

Cap Table

A cap table (capitalization table) is the spreadsheet that tracks who owns what in your company: founders, employees, investors, and option holders.

Glossarybeginner

Option Pool

An option pool is a chunk of company shares set aside for current and future employees, usually 10–20% of the company.

Glossarybeginner

Post-money valuation

Post-money valuation is the value of a company immediately after it receives a round of investment. Pre-money valuation plus the new money in.

Glossarybeginner

Pre-Money Valuation

The pre-money valuation is what your company is worth immediately before an investment round closes. Add the new investment to get the post-money valuation.

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Dilution is the drop in your ownership percentage when a company issues new shares. It happens every time the company sells shares to a new investor or expands the option pool.

How it works

If you own 1,000 shares out of 10,000 total (10%) and the company issues 2,500 new shares to a Series A investor, the total share count rises to 12,500. Your 1,000 shares now represent 1,000 / 12,500 = 8%. You still own the same number of shares, but your slice of the bigger pie is smaller.

Why it isn't always bad

Dilution is the price of growth capital. Owning 8% of a $50M company is worth more than owning 10% of a $5M company. The question is whether the round's valuation fairly compensates for the ownership you're giving up.

Sources of dilution founders forget

  • Option pool top-ups. Investors usually require a 10–20% option pool before their investment, which dilutes founders, not the new investor.
  • Convertible notes / SAFEs. Stacked SAFEs can convert into a larger share than founders modeled.
  • Anti-dilution provisions. Investor rights that issue more shares to existing investors if a future round prices below their original price.

Always model the cap table at the next two rounds before signing a term sheet.