Dilution — How It Works (and How to Model It)

Dilution reduces ownership percentages as new shares are issued. Founders must understand how dilution works, how to model it, and how it affects both control and upside.

Why it Matters

Every time you raise money or expand your option pool, your ownership shrinks — that’s dilution. It’s not always bad, but failing to model it can lead to surprise losses of control or misaligned founder incentives.

Founders Checklist

Model dilution before every financing round
Understand pre-money vs post-money valuation dynamics
Include option pool expansion in your calculations
Use a cap table tool to simulate different funding scenarios
Align founder/investor expectations around long-term ownership

Founder Fails

Didn’t model SAFE conversion > lost 20% to unexpected dilutio
Accepted large pre-money option pool expansion > excessive founder dilution
Gave away too much early > hit Series A with only 25% founder ownership

When to ask for Help

When preparing for a financing round
To model dilution across different funding or option scenarios
If evaluating convertible instruments like SAFEs or notes
When issuing significant new grants or expanding the option pool
During exits or M&A discussions where ownership breakdown matters

Frequently Asked Questions

Q: Is dilution always bad?
A: No. If the company’s value grows faster than your ownership shrinks, you’re still winning. The goal is to raise enough capital to grow, not to hoard equity.

Q: What causes dilution?
A:

Fundraising (new shares issued)
Option pool expansion
SAFE or convertible note conversions
Secondary sales (sometimes)

Q: What’s a healthy target for founders post-Series A?
A: Aim to retain at least 50–60% combined founder ownership by the end of Series A. This shows long-term alignment and keeps you in control.