Legal & Equity
Dilution
Also Known As
Equity DilutionOwnership Reduction
Dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders even though their number of shares remains the same.
What is Dilution?
Dilution is the mathematical result of creating new shares. If you own 50% of a company with 1M shares (500K shares), and the company issues 1M new shares, you now own 25% (500K of 2M shares)—even though you still have the same 500K shares.
When Dilution Happens
- Funding Rounds: New investor shares
- Option Pool: Employee equity reserves
- Convertible Notes: Convert to equity
- Warrant Exercise: Options become shares
Dilution Math Example
| Round | New Shares | Total Shares | Founder % |
|---|---|---|---|
| Start | 1,000,000 | 1,000,000 | 100% |
| Seed | 250,000 | 1,250,000 | 80% |
| Series A | 500,000 | 1,750,000 | 57% |
| Series B | 750,000 | 2,500,000 | 40% |
Dilution Protection
- Anti-dilution provisions: Protect investors in down rounds
- Pro-rata rights: Right to maintain percentage
- Negotiation: Minimize option pool increases
Studio Dilution
Studios experience dilution alongside founders but start with larger stakes (30-50%), providing more cushion.
Example Usage
“After the Series A, the founder's stake was diluted from 60% to 45%.”