What is Dilution?
Dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. While the percentage decreases, the actual value may increase.
How Dilution Works
Example:
- Before: You own 50% of 1M shares (500,000 shares)
- Company issues 500,000 new shares to investors
- After: You own 33% of 1.5M shares (still 500,000 shares)
Sources of Dilution
- Fundraising rounds (most common)
- Employee stock option pools
- Convertible notes converting
- Warrant exercises
- Anti-dilution provisions triggering
Managing Dilution
- Raise at higher valuations
- Keep option pools reasonable
- Understand anti-dilution terms
- Plan your funding strategy
- Focus on growing total pie value