Guide

Cap tables and equity

How dilution works

Your share count stays put; the denominator grows. Each round multiplies old ownership by (1 minus the new-money percent).

74 of 133 · 2 min read

Dilution is what happens when the company issues new shares. Your absolute share count stays the same. Your percentage falls because the fully diluted denominator grows. The hope is that the pie got larger in dollars even as your slice shrank.

The big idea

You owned 10% of 10 million shares — 1 million shares. The company issues 2.5 million new shares.

You still hold 1,000,000
New total     = 12,500,000
Your %        = 1,000,000 / 12,500,000 = 8%

A bakery that sells more tickets to the same kitchen is the picture. You did not give slices away; more tickets were printed. The analogy breaks on option-pool expansions: those new tickets are often carved from the pre-money, so founders dilute again before the new cash even arrives.

For any round that sells fraction d of the post-money company to new investors (ignoring pool shuffles):

new_ownership = old_ownership × (1 − d)

Two rounds at 20% each:

× 0.80 × 0.80 = × 0.64

A founder at 40% after seed is at 40% × 0.64 = 25.6% after two such rounds — before pool expansions. Pool top-ups of 5–10 points of post-money, taken from the pre-money, are often as painful as a few points of "visible" round dilution.

Walking through it

Trade-off

Raise more at a higher valuation vs raise less and stay lean. More capital buys runway. It also sells a larger d (or the same d of a larger company). Raising $3M at a $12M post sells 25%. Raising $3M at a $20M post sells 15%. If you can defend the higher valuation without absurd terms, you keep more. If you cannot, a clean smaller raise beats a bloated table and a down round later.

Post-money SAFEs lock % = investment ÷ cap and stack: each new SAFE dilutes prior SAFE holders as well as founders. Granting options from an already-reserved pool does not change FD or founder %. Creating or expanding the pool does.

Common mistakes

  • Watching share count instead of percent. Employees leave with the same grant and a smaller %. That is dilution, not a clawback.
  • Ignoring the pool shuffle. The top-up Series A demanded is extra d on founders and SAFEs, not on the new preferred.
  • Promising "you'll own X%" without saying fully diluted and "before the next raise."

Check yourself

You own 40%. The company sells 20% twice, no pool change. Where do you land?

40% × 0.8 × 0.8 = 25.6%.

Why does a 15% post-money pool top-up taken from the pre-money hurt founders more than it looks?

The new investor does not share that dilution. Founders and prior holders fund the whole top-up.

Key takeaways

  • Dilution grows the denominator. Your share count usually stays put.
  • Each round multiplies old ownership by (1 − new investor post-money %).
  • Pool expansions multiply it again, often from the pre-money.

Further learning

See the numbers play out in walking a cap table.

Fully diluted ownership

Authorized vs issued vs fully diluted — and why "I own 1%" is meaningless until you name the denominator.

Cap tables and dilution

The ownership ledger from founding through Series B — start here for the map, then walk the numbers.

Option pools

Reserved equity for hiring — size it from a plan, watch the pre-money shuffle, and refresh before the tank is empty.