Dilution is the drop in an existing shareholder's ownership percentage that happens when a company issues new shares, most often by raising a new round of funding.
Dilution is calculated as the new money raised divided by the resulting post-money valuation (pre-money valuation plus the raise). A company raising $1.5M on an $8.5M pre-money valuation ends up at a $10M post-money valuation, with new investors owning 15% of the company and every existing shareholder's stake shrinking to match.
Dilution compounds across rounds. A founder who owns 100% at formation might own well under half by the time the company reaches a Series B, without anyone doing anything wrong. Rounds where new investors end up owning more than 30% in a single raise are on the high end for seed and Series A deals, and it's better to know that going in than to find out mid-negotiation.
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