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Equity dilution happens every time a company issues new shares. When investors receive new shares in exchange for their investment, the total share count increases and every existing shareholder owns a smaller percentage — even though their absolute share count is unchanged.
The math
Pre-money valuation: $5,000,000 Investment: $1,000,000 Post-money valuation: $6,000,000 Investor ownership: $1M / $6M = 16.7%
If you held 60% pre-round (6M of 10M shares), you now hold: 6M / (10M + 2M new shares) = 50%
Your ownership dropped from 60% to 50% — a 10pp dilution.
Pre-money vs post-money valuation
These terms cause significant confusion in fundraising negotiations:
Pre-money: Company value before the investment. Post-money: Pre-money + Investment amount.
When an investor says "I'll invest $1M at a $5M valuation," clarify: is that $5M pre-money or post-money? The difference is significant: - $5M pre-money: investor gets 1M / 6M = 16.7% - $5M post-money: investor gets 1M / 5M = 20%
Always specify pre-money in term sheets.
Cumulative dilution across rounds
Dilution compounds. Typical dilution by stage:
| Round | Dilution | Cumulative founder ownership |
|---|---|---|
| Pre-seed ($500k) | 10–15% | 85–90% |
| Seed ($1–2M) | 15–25% | 65–75% |
| Series A ($5–10M) | 20–30% | 45–55% |
| Series B ($20–40M) | 15–25% | 35–45% |
Dilution at each round is on the post-round cap table, not the original. A founder at 85% post-seed who raises a 20% Series A retains 85% × 80% = 68%.
Option pool shuffle
Investors often require creating or expanding an option pool before the funding round closes — increasing dilution on founders. A "20% post-money option pool" on a $6M round means creating shares equal to 20% of the post-round cap table. This dilutes founders before investors, increasing effective pre-money dilution.
Model this by adding option pool shares to "current shares outstanding" before running the calculator.
Frequently asked questions
What does this calculator do? Model founder and investor dilution from a funding round: post-money valuation, new shares issued, and your ownership percentage after the round.