Dilution
Why it matters
Dilution is not automatically bad. A smaller slice of a much larger business can be worth far more than a big slice of a small one. The real question is whether the cash raised created more value than the ownership given up for it.
What matters most is whether dilution is chosen. Trouble comes from the accidental kind: stacked convertible notes, an option pool padded for hiring that never happens, or a round raised from a weak position at a low price.
How to apply it
- Model every round, grant and option pool on the cap table before agreeing to it, not after signing.
- Track the fully diluted figure, which assumes every option and convertible has converted. That is the number that is true on the day someone buys the company.
- Ask what the new money will buy before accepting the ownership cost.
- Size the option pool to real hiring plans for the next year or so.
- Revisit the cap table after every round.
What it is
A company's ownership is split into shares. When it creates new ones and gives them to someone else, every existing holder owns a smaller percentage, even though they still hold the same number of shares.
A simple case: two founders own 100 per cent of a company. An investor puts in 500,000 euros at a pre-money valuation of 2,000,000 euros. The company is now worth 2,500,000 euros after the money arrives (the post-money valuation), so the investor owns 20 per cent and the founders share 80 per cent. Their stake is worth 2,000,000 euros, the same as before the deal, but now the company also has 500,000 euros in the bank.
Common mistakes
- Treating dilution as pure loss and refusing money that would have grown the whole company.
- Forgetting that a SAFE or convertible note also converts into shares later, so it dilutes too.
- Looking only at percentage and ignoring control, such as voting rights and board seats.
