Dilution

Dilution is the reduction in a founder’s percentage ownership of a company that happens every time new shares are created and sold to investors, employees, or advisors. A founder who starts with 100% of her company will typically own less than 60% after a seed round, less than 30% after a Series B, and 15 to 25% by the time a Series C closes, even if the value of her remaining shares has gone up.

How It Works

The mechanics

When a company raises money, it creates new shares and sells them to investors. If a founder owns 1,000 shares out of 1,000 total (100%), and the company creates 250 new shares for a seed investor, the founder still owns 1,000 shares, but now out of 1,250 total, dropping her ownership to 80%. The investor owns 20%. The founder did not sell anything or lose anything in absolute terms, but her percentage of the whole company shrank.

The option pool trap

Beyond the investor’s stake, venture capital term sheets almost always require the company to set aside an employee stock option pool before the investment closes, and this pool comes out of the founders’ share, not the investors’. A typical seed round takes 20% for the investor and requires a 15% option pool, which means the founder goes from 100% to roughly 65% in a single transaction. Most first-time founders do not understand that the option pool dilutes them on top of the investment itself.

When dilution is worth it

Dilution is not inherently bad. If a founder owns 60% of a company worth $5 million ($3 million) and raises a round that drops her to 40% but increases the valuation to $20 million, her stake is now worth $8 million. She owns less of the company but her shares are worth nearly three times more. The problem is when dilution outpaces valuation growth, which happens in down rounds, flat rounds, or when the option pool is refreshed at every stage.

Real Example

Poppi founders Allison and Stephen Ellsworth started with 100% of the company and held approximately 12% by the time PepsiCo acquired it for $1.95 billion. That 12% was still worth roughly $234 million pre-tax because the company had grown enormously, but it illustrates the math: after a Shark Tank deal (25% to Rohan Oza), a Series A, a Series B, and option pool allocations, the founders owned a sliver of the company they built from their kitchen. Compare that to Sara Blakely, who turned down every investor for 21 years, owned 100% of Spanx when Blackstone bought a majority stake, and kept roughly $1 billion from that single transaction.

Go Deeper

• Equity and Ownership: What ownership actually means and how different share classes work.
• Venture Capital: How each funding stage dilutes founders and what term sheet provisions control it.
• Seed Round: Where dilution starts, and how much founders give up in the first round.
• Down Round: When dilution gets worse because the company raises at a lower valuation.

Frequently Asked Questions

What is dilution in startup funding?

Dilution is the decrease in a founder’s percentage ownership that occurs when a company issues new shares to investors, employees, or advisors. The founder’s absolute number of shares stays the same, but the total number of shares increases, so each existing share represents a smaller slice of the whole company. Median dilution runs 20.1% at seed, 20.5% at Series A, and 16.7% at Series B.

How much ownership does a founder have after multiple rounds?

A founder who starts at 100% typically holds 55 to 65% after seed (including option pool), 35 to 45% after Series A, less than 30% after Series B, and 15 to 25% after Series C, according to Carta data. These are median figures, and founders with strong leverage can negotiate better terms, while those in competitive fundraising environments may give up more.

Can you avoid dilution?

The only way to avoid dilution entirely is to never raise outside capital, which is what Sara Blakely did with Spanx for 21 years and what Ann McFerran did with Glamnetic. Founders who do raise can minimize dilution by raising at higher valuations, negotiating smaller option pools, raising fewer rounds, or reaching profitability quickly enough to avoid needing additional capital.

Is dilution always bad?

Not if the valuation grows faster than the ownership shrinks. Owning 15% of a $10 billion company ($1.5 billion) is better than owning 100% of a $5 million company ($5 million). The question is whether the funding actually enables the growth that justifies the dilution, and for the 75% of venture-backed startups that never return money to investors, the answer is no.

Sources

• Carta, “Dilution Data Q1 2024,” 2024. Median dilution rates by round, option pool sizing data.
• SaaStr/Carta, “The Actual Dilution from Series A, B, C, and D,” 2024. Round-by-round ownership benchmarks.
• EquityList, “Founder Ownership by Round,” 2024. Cumulative dilution analysis across funding stages.