What Is Dilution?
Dilution is the drop in an existing owner's percentage of a company when new shares are issued to someone else.
How it works
When a company issues new shares, such as to investors or to an employee option pool, the total share count rises. Each existing holder keeps the same number of shares but owns a smaller slice of a bigger total. Your percentage falls even though nothing was taken from you.
The formula in words: your new ownership equals your shares divided by the new total number of shares. Dilution is not always a loss. A smaller slice of a more valuable company can be worth more than a bigger slice of a struggling one.
Example
For example, a founder owns 5,000,000 of 10,000,000 shares, or 50 percent. The company issues 2,500,000 new shares to an investor, so the total is 12,500,000. The founder still has 5,000,000 shares but now owns 40 percent. That is a 10 percentage point dilution. If the new money helps the company grow, the founder's smaller stake may be worth more in dollars.
Why founders care
Every round, and every option pool top-up, dilutes you. Over several rounds founders can end up with a minority stake, which affects control and payouts. Terms such as valuation, pool size and convertible instruments all change how much you give up, so model them before signing.
Common mistakes
- Focusing only on the valuation and ignoring a pool increase that comes before the investment.
- Forgetting that SAFEs and notes also dilute when they convert.
- Treating percentage ownership as the only measure instead of the dollar value of the stake.
Frequently asked questions
How much dilution is normal in a funding round?
It varies by stage, market and deal terms, so there is no fixed number. Compare actual offers, model them on your cap table and ask experienced advisors or a startup lawyer what is typical right now.
Can you avoid dilution?
Not entirely if you raise outside money or grant options. You can limit it by raising less, bootstrapping longer, or negotiating terms, but some dilution is a normal cost of funding growth.
Related terms
Go deeper
- How to Split Equity Between Co-Founders (and Vesting) GuideHow to split equity between co-founders: factors to weigh, equal vs unequal splits, 4-year vesting with a 1-year cliff, and a worked example with round numbers.
- How to Value a Startup: Methods for Pre-Revenue Companies GuideHow to value a startup before it has revenue: common methods, pre-money vs post-money, and a worked dilution example with round numbers you can follow.
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General information, not legal, tax or financial advice. Reviewed 11 November 2026.