Dilution
Dilution is your ownership percentage falling because the total number of shares went up. Your own shares do not move. The number underneath them does.
That is the whole mechanism, and it is worth seeing on one cap table rather than in the abstract.
One founder holding, three events
The founders hold 8,100,000 shares at the start and hold exactly 8,100,000 shares at the end. They never sell, transfer or forfeit a share.
| Founder shares | Total fully diluted | Founders own | |
|---|---|---|---|
| Start | 8,100,000 | 9,000,000 | 90.0% |
| After three SAFEs convert | 8,100,000 | 10,000,000 | 81.0% |
| After the priced round | 8,100,000 | 12,500,000 | 64.8% |
Twenty-five points of ownership, and the numerator never changed once.
The three SAFEs are the ones worked through on the SAFE stack page: $850,000 across three post-money caps. The priced round is $2,000,000 at a $10,000,000 post-money valuation.
The three ways the denominator grows
Someone buys shares. A priced round issues new shares to an investor. This is the version everyone expects.
Something converts. SAFEs and notes issued earlier turn into shares at the round. No new money arrives at that moment; the money arrived when the instrument was signed.
Shares are reserved. An option pool top-up adds shares to the count before anyone holds them. No money arrives at all.
All three do the same thing to your percentage. The cap table does not record which of the three a share came from, only that it is in the total.
What dilution is not
It is not losing shares. You hold what you held.
It is not automatically losing value. A smaller percentage of a company that raised money at a higher valuation can be worth more than a larger percentage of one that did not. What it is worth depends on the valuation, which this arithmetic does not tell you.
It is not a single event. The table above has three steps and only one of them involved a negotiation about price.
What to check in your own documents
- Track your share count and your percentage separately. They tell you different things and only one of them moves.
- Before agreeing to anything, ask what it adds to the fully diluted total. That is the question behind pool sizes, conversion terms and round sizes alike.
- Work out the percentage after everything converts, not just after the round. Instruments signed a year ago land in the same event as the new money.
Run it on your own numbers
Three events on one cap table is a table you can keep in your head. Your real cap table, with your real instruments, and then the round after this one, is not.
Promythia holds the denominator across every event and shows you the percentage at each step. Create a free account and enter your real cap table.
Promythia offers market and strategy guidance. It is not legal or financial advice.