Dilution Protection
Definition
Any contractual mechanism that shields an investor or shareholder from the negative effects of new share issuance. For investors, this includes anti-dilution provisions, pro-rata participation rights, and most-favored-nation clauses. Employees almost never have dilution protection — your ownership percentage decreases with every new funding round.
Real-World Example
An investor with pro-rata rights and weighted-average anti-dilution maintains their ownership percentage by participating in new rounds and gets price protection in down rounds. Meanwhile, employees without protection see their 0.5% ownership shrink to 0.3% over three funding rounds.
Common Mistake
Assuming your equity percentage remains constant. Without dilution protection, every fundraise, option pool expansion, and SAFE conversion reduces your ownership. Plan for 15-25% dilution per funding round when estimating long-term equity value.
Why It Matters
Understanding that employees bear the full weight of dilution (while investors are often protected) is essential for realistic equity planning. Factor in 2-4 rounds of dilution between now and a potential exit.
Related Terms
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