The Dilution Formula
Dilution is straightforward: when new shares are issued, the total share count increases, which reduces everyone else's percentage. The formula is:
Post-round ownership % =
Pre-round ownership % × (Pre-money shares / Post-money shares)
Where: Post-money shares = Pre-money shares + New shares issued
Worked Example
| Pre-seed Round | |
|---|---|
| Founder pre-round ownership | 80% |
| Investment amount | $500,000 |
| Pre-money valuation | $2,000,000 |
| Post-money valuation | $2,500,000 |
| New investor ownership | 20% ($500K / $2.5M) |
| Founder post-round ownership | 64% (80% × 2M/2.5M) |
| Founder dilution | 16 percentage points |
Cumulative Dilution Across Multiple Rounds
Dilution compounds across rounds. A founder who starts at 100% and raises three rounds will typically retain 50–65% by Series A — before any option pool. Here is how it stacks up in a realistic example:
| Round | New Shares | Total Shares | Founder Shares | Founder % | Fully Diluted % | Notes |
|---|---|---|---|---|---|---|
| Pre-seed (Founding) | — | 10,000,000 | 10,000,000 | 100.00% | 100.00% | Founding shares only |
| Pre-seed (SAFE) | ~1,111,111 | 11,111,111 | 10,000,000 | 90.00% | 90.00% | $500K SAFE at $5M cap, converted at 1:1 |
| Seed | 2,000,000 | 13,111,111 | 10,000,000 | 76.26% | 74.12% | 15% new option pool added pre-close |
| Series A | 4,000,000 | 17,111,111 | 10,000,000 | 58.44% | 55.21% | Typical 20-25% VC ownership at Series A |
Note: Fully diluted % includes the option pool as if all options were issued and exercised.
What Is a Reasonable Amount of Dilution Per Round?
| Stage | Typical Dilution | Notes |
|---|---|---|
| Angel / Pre-seed | 5–15% | Single angel or small syndicate |
| Seed | 10–20% | Including option pool expansion |
| Series A | 15–25% | Lead VC takes meaningful ownership |
| Series B | 10–20% | Smaller dilution as valuation rises |
| Growth rounds | 5–15% | Late-stage, higher pre-money |
These are ranges, not rules. What matters is whether the valuation at which you are diluting is fair. 25% dilution at a £20M pre-money is significantly better for founders than 15% at a £2M pre-money.
CapBrief
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CapBrief calculates dilution automatically from your CSV — across every share class, every convertible note, every option grant. It shows the ownership waterfall visually and produces a round summary with pre-money and post-money ownership for every stakeholder.
Upload Your Cap Table Free →The Option Pool Shuffle — The Hidden Dilution Founders Miss
The option pool shuffle is one of the most commonly misunderstood aspects of startup funding, and it exclusively benefits investors at the expense of founders.
Here is how it works: Investors require you to create or expand an option pool as a condition of investment. The term sheet specifies the pool must exist pre-investment. This means the pool is created from the pre-money share count — which dilutes founders before the investor even writes a cheque.
The investor's effective pre-money valuation is lower than the stated number because the pool reduces the per-share price. Founders pay for the option pool in dilution; investors do not.
How to negotiate
Ask for the option pool to be created post-investment, or for the stated pre-money valuation to include the pool. Either approach eliminates the shuffle. Many investors will accept this if you raise it clearly during term sheet negotiation.
Anti-Dilution Clauses — How They Work
Anti-dilution provisions protect investors if you raise a down round — a round at a lower price per share than their investment. There are two main types:
Full Ratchet
The investor's conversion price resets to the new lower price. This can be highly punitive — the investor receives additional shares to make them whole at the expense of founders. Aggressive investors may push for this; founders should resist.
Weighted Average
The conversion price adjusts proportionally based on the number of new shares issued and their price. This is the standard market approach — much more founder-friendly than full ratchet. Almost always preferable.
Anti-dilution clauses only trigger in down rounds. If you raise at a higher price than the previous round (an up round), they are irrelevant. The best protection against anti-dilution provisions is not raising a down round — which means being careful about the valuation you set in earlier rounds.
Frequently Asked
Is 20% dilution per round normal?
At seed and Series A, yes — 15–25% dilution per round is typical for a meaningful round from institutional investors. Pre-seed angel rounds tend to be smaller (5–15%). What matters more than the percentage is the valuation: 20% dilution at a £10M pre-money is very different from 20% at a £2M pre-money.
What is the difference between dilution and down rounds?
Dilution happens in every round — your percentage ownership decreases as new shares are issued. A down round is when new shares are issued at a lower price per share than the previous round. Down rounds cause both dilution and a reduction in the value of existing shares. They can also trigger anti-dilution provisions that cause additional share issuance.
Do SAFE notes dilute founders immediately?
No. SAFE notes do not dilute you at the time of investment — they convert into shares at the next qualifying round. However, they appear in your fully diluted share count from the moment they are issued, which affects how future investors calculate their ownership percentage. The dilution is real, just deferred.
How do I calculate post-money ownership for a new investor?
New investor % = Investment Amount / Post-money Valuation. Example: $500K investment at $5M post-money = 10% ownership. Post-money valuation = Pre-money valuation + Investment amount. The key trap is that the option pool, if created pre-close, reduces pre-money ownership and should be included in the pre-money share count.
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