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Intermediate

What is dilution

Also known as: share dilution, equity dilution

Definition

Dilution is the fall in existing shareholders' percentage of a company when it issues new shares. The percentage drops, while the stake's value can rise.

Why it matters

Dilution is the price of raising money and hiring with shares, so it is normal, and the real question is what it buys.

Common mistakes

Counting only the investor's percentage and missing the option pool created in the same round, which the existing holders pay for.

Related terms

Worked exampleIllustration

One seed round, with and without an option pool

Illustrative numbers: a fictional clinic booking app raises ₪1,000,000 at a ₪4,000,000 pre-money valuation.

  1. No pool

    The founders own 100%. The investor's ₪1,000,000 makes the post-money ₪5,000,000, so the investor owns

    1,000,000 ÷ 5,000,000 = 20%

  2. No pool

    The page's formula gives the founders' new percentage.

    100% × (1 - 0.20) = 80%

  3. No pool

    80% of ₪5,000,000 is the same paper value the founders had before the round.

    ₪4,000,000

  4. A 10% pool

    The real term sheet asks for a 10% option pool created before the money, so the founders' 7,000 shares end as 7,000 of 10,000.

    70%

  5. A 10% pool

    At ₪500 a share, the founders' shares are now worth

    7,000 × ₪500 = ₪3,500,000

The percentage fell by 30 points. The pool, not the investor, took a third of that.

Illustration

A smaller slice of a bigger company

Before the round: ₪4,000,000, Founders 100%. After the round: ₪5,000,000, Founders 80%, New investor 20%.⁨Before the round⁩⁨After the round⁩100%80%20%₪4,000,000₪5,000,000
  • Founders80%
  • New investor20%

The founders' share falls from 100% to 80%, yet their shares are still worth ₪4,000,000, the same as the pre-money. Turn on the pool to see who pays for it.

Each pie's area is the company's value. The founders' percent falls, and whether their shares lose value depends on who pays for the pool.

Definition

Dilution is the drop in an existing shareholder's percentage of the company, and of the votes, when the company issues new shares to someone else: an investor, an option holder or a SAFE that converts. The number of shares the holder owns does not change, the total does. A sale of existing shares between holders creates no new shares, so it dilutes no one, and a holder who buys their pro rata part of a new round keeps their percentage.

Why it matters

If the round lets the company grow its value faster than the percentage shrinks, the smaller slice is worth more. Founders often count only the investor's slice and miss the rest: an option pool created inside the pre-money valuation dilutes the existing holders too, and SAFEs dilute everyone at once when they convert.

Directly related: Equity, Cap table, Vesting.

Formula

Post-Money Ownership = Pre-Money Ownership * (1 - Dilution Percentage)

Dilution in a public company

Shareholders of a listed company meet dilution too, through the same mechanism: new shares make the total larger. It happens when the company sells new shares in an offering, when employees exercise their options, and when convertible bonds or other convertible securities turn into shares. The more shares created, the smaller each existing holder's percentage.

In a rights offering the company offers the new shares to its existing holders first, in proportion to what they already hold, so a holder who buys their part keeps their percentage and one who does not is diluted. Companies also report earnings per share on a diluted basis, as if every option and convertible had already become a share. This is general information for learning, not investment advice.

Improvement tips

  • Model every SAFE, convertible note and option pool on a fully diluted cap table before you sign the next round.
  • Raise what the next milestone needs and ask what the money buys: if the company's value grows faster than your percentage falls, the dilution paid for itself.
  • For a short, specific need, look at money that does not dilute, such as revenue based financing or a loan.
  • Ask for the option pool to match a real hiring plan, because a larger pool inside the pre-money dilutes the existing holders, not the investor.

Common mistakes

  • Forgetting that several SAFEs all convert at once in the first priced round.
  • Accepting heavy dilution for money that buys no real acceleration.
  • Calling the founders' first allotment dilution. Dilution starts with the first shares issued to anyone after them.

Related terms

StartupsBeginner

Equity

Equity is ownership of a company, measured in shares and percent. On a balance sheet the same word means book equity: what the business owns minus what it owes.

StartupsIntermediate

Cap table

A cap table (capitalization table) shows who owns how many shares and options in a company, and what percentage each holds on a fully diluted basis.

StartupsIntermediate

Vesting

Vesting is a schedule under which shares or options granted to you become yours to keep or exercise step by step, as long as you keep working for the company.

FinanceBeginner

Runway

Runway is the number of months a business can keep going on the cash it has today, at its current pace of spending and income: cash divided by monthly net burn.

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A careful comparison of public stocks, bonds, funds, private startup exposure, liquidity, diversification, and founder lessons.

Quick check

A founder owns 80% of a company. A new round issues shares equal to 25% of the company after the round. What does the founder own after it?

Choose an answer

Frequently asked questions

Do I need to think about dilution before I raise money?
Yes, at a basic level. Every investor, option grant and SAFE takes a slice, so plan how much of the company each stage of funding will cost.
When does dilution first happen?
With the first new shares issued to anyone after the founders' own allotment: an investor, an employee exercising options or a SAFE converting. The founders' first split is not dilution.
How can I protect myself from dilution?
Raise what the next milestone needs, negotiate the pre-money valuation and the pool size, and know two clauses by name. A pro rata right lets a holder buy their share of a new round and keep their percentage. Anti-dilution protection adjusts an investor's price if a later round is priced lower. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
Should I avoid raising money to avoid dilution?
Not raising keeps your percentage whole but may slow the company down. The better question is whether the money will make the company worth more than the slice it costs.
Why does dilution matter if the company's valuation is rising?
Because the percentage decides your share of any sale and of the votes. A rising valuation can cover a falling percentage, but only if each round is priced higher than the last.
How do I calculate the dilution from my SAFEs?
For a post-money SAFE that converts at its cap, the investor's percentage is the amount divided by the cap: ₪500,000 on a ₪5,000,000 cap is 10%. Add every SAFE first, then model the priced round on top. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
What goes wrong when a company raises several rounds without modelling dilution?
Founders can end up with too little to stay motivated, or lose control of the votes without noticing when it happened. A fully diluted cap table, updated before every round, shows it in advance.
How do I explain dilution to employees who hold options?
Show value, not only percentage. Option holders are diluted by new shares like everyone else, but their options are now a slice of a company the round made worth more.
What is dilution in simple words?
Cutting the same pizza into more slices. Your slice is a smaller share of the pizza, but if the pizza grows, your slice can still get bigger.
Is dilution bad for a founder?
Not by itself. It is the normal cost of raising money and hiring with shares. It is bad when the money it brings does not grow the company.
Who decides to issue new shares?
In an Israeli company, new shares are allotted under the company's articles, usually by a board decision. The allotment is recorded in the shareholder register and reported to the Registrar of Companies. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
Will dilution cost me money?
No cash leaves your pocket. You own a smaller share of future profits, of any sale and of the votes.

Sources: Y Combinator, SAFE documents and SAFE User Guide (ycombinator.com/documents), read September 2026, Companies Law 5759-1999, sections 127 to 130 (nevo.co.il), Investor.gov (U.S. Securities and Exchange Commission), glossary, "Convertible Securities" (investor.gov), IFRS Foundation, IAS 33 Earnings per Share, diluted earnings per share (ifrs.org)

Last reviewed: 2026-09-27

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