Understanding Dilution

Every time a company issues new shares, existing holders own a smaller percentage of a larger total. This is dilution, and it is a normal feature of building a company that raises multiple rounds.

Dilution is not automatically bad. Owning 1% of a company worth $500M is worth considerably more than owning 3% of a company worth $10M. The relevant question is whether the capital raised creates more value than the ownership it costs.

Sources of dilution include new financing rounds, option pool expansions, and the conversion of SAFEs and notes issued earlier. Option pool increases negotiated as part of a round are frequently taken out of the pre-money valuation, which means existing holders absorb them.