What is Equity Dilution?
Equity dilution is what happens when a company issues new shares (to investors, to create or expand an option pool, or via other equity grants) and your ownership percentage goes down—even if you still own the same number of shares.
It matters because dilution reshapes control and voting power, and it reduces your slice of the future exit value (what you’d get in an acquisition or IPO). In practice, dilution ties directly into cap table outcomes, founder incentives, and whether growth financing is creating real shareholder value after you consider things like pre-money valuation, post-money valuation, and your implied equity value at exit.
Formula
Notes: “Fully diluted shares” typically includes common shares plus in-the-money options or warrants and the option pool, depending on how your cap table is defined. The core logic is simple: your share count stays constant, total shares increase.
Example
Existing fully diluted shares: 10,000,000
Your current ownership: 15%
New shares issued in this round: 2,500,000
Your Shares = 0.15 × 10,000,000 = 1,500,000
Total post-round shares = 10,000,000 + 2,500,000 = 12,500,000
Post-round ownership = 1,500,000 ÷ 12,500,000 = 12%
Dilution (pp) = 15% − 12% = 3 pp
New investors’ ownership = 2,500,000 ÷ 12,500,000 = 20%
How to interpret it: you didn’t lose shares—you lost percentage ownership because the denominator grew. To judge whether the dilution was worth it, founders usually compare the new post-money valuation against the capital raised, then pressure-test potential outcomes using exit value, equity value, and—where relevant—the impact on enterprise value after accounting for net debt.