Dilution

Dilution occurs whenever a company issues new shares — through fundraising rounds, employee option grants, or warrant exercises. Each new share reduces the percentage ownership of all existing shareholders. Example: you own 20% of a company. The company raises a Series A issuing 25% new shares. Post-round, your stake is diluted to approximately 15%. Dilution is not inherently bad — if the new capital increases the company's value more than it dilutes, you own a smaller piece of a more valuable pie. However, excessive dilution (through bad terms, large option pools, or frequent down rounds) can leave founders with minimal ownership by the time of a successful exit. Anti-dilution provisions and pro-rata rights are tools to manage dilution.