Dilution
Definition
The reduction in your ownership percentage when the company issues new shares. Every fundraising round, option pool expansion, or warrant conversion creates new shares, reducing existing shareholders' percentage ownership. Your number of shares stays the same, but you own a smaller slice of a (hopefully) larger pie.
Real-World Example
You own 100,000 shares out of 10,000,000 total (1%). The company raises a round and issues 5,000,000 new shares. You still own 100,000 shares, but now out of 15,000,000 total — your ownership dropped from 1% to 0.67%. However, if the round valued the company at 3x the previous price, your shares are worth more in absolute dollars despite the dilution.
Common Mistake
Panicking about dilution without considering valuation. If your ownership drops from 1% to 0.5% but the company is worth 10x more, your equity is worth 5x what it was. Dilution is only harmful when the company is not growing in value to compensate.
Why It Matters
Every startup employee will experience dilution. Understanding it prevents both panic (when dilution is accompanied by growth) and complacency (when dilution is destroying your actual value). Always track both percentage ownership and dollar value.
Related Terms
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