Finance

Equity Dilution: How It Works and Impact on Ownership

Amy Richards | | 3 min read

Dilution occurs when a company issues new shares, reducing existing shareholders' ownership percentage.

How Dilution Works

New shares = more total shares = each share = less %

Example

Before financing:

  • Founder: 1,000,000 shares (100%)

VC invests $1M for 200,000 new shares:

  • Total shares: 1,200,000
  • Founder: 1,000,000 / 1,200,000 = 83.3%
  • VC: 200,000 / 1,200,000 = 16.7%

Anti-Dilution Provisions

Protections for investors:

  • Weighted average: Adjusts conversion price
  • Full ratchet: Adjusts to new lower price

Key Points

  • Dilution is normal in fundraising
  • Founders typically own 15-25% after Series A
  • Value can increase despite dilution

Internal links (related)

Author

Amy is a CPA with 14 years of experience.