Dilution: what happens to your ownership when you raise (and pre-money vs post-money explained)

The word that makes founders flinch

The first time someone tells you that raising money means "getting diluted", it can sound like a threat. You built this company. You own it. Now you're told that taking investment will shrink what you own.

That's true, but it's only half the story. Dilution isn't money being taken from you. It's a decision that a smaller slice of a bigger, better-funded company is worth more than a big slice of a small one. Done deliberately, it's how founders build valuable stakes. Done blindly, it's how founders reach their third round owning far less than they assumed.

This guide makes it concrete: what dilution is, how pre-money and post-money valuations drive it, how the option pool changes the picture, and what a typical cap table looks like across two rounds.

What dilution actually is

Say your company has 1,000,000 shares and you own all of them. That's 100%.

To raise money, you don't sell your existing shares. The company creates new shares and sells those to the investor. The total number of shares goes up. Your share count stays exactly the same, but it's now a smaller fraction of a bigger total.

Your ownership = your shares ÷ total shares in issue.

Nothing is subtracted from you. The bottom of the fraction just grows. Think of a pizza cut into eight slices, all yours. A friend pays for a bigger pizza and you re-cut it into ten. You still have eight slices, but you own eight-tenths instead of eight-eighths. The point is that the pizza got bigger, and there's now cash in the bank that wasn't there before.

Because the investor's slice depends on the valuation, dilution and valuation go together. The higher the valuation, the fewer new shares the company issues to raise the same money, and the less your slice thins.

Pre-money vs post-money valuation

These two words decide how much of your company a cheque costs you.

Pre-money valuation is what the company is worth before the new money goes in. It's the value you and the investor agree the business already has.

Post-money valuation is what it's worth straight after the money goes in:

Post-money = pre-money + amount invested.

The cash doesn't vanish. It sits in your bank account and becomes part of the company's value, so the company is worth more the moment the money lands, by exactly the amount that landed.

The investor's percentage is always worked out against the post-money figure, because they're buying a share of the company as it exists once their money is in it:

Investor's ownership = amount invested ÷ post-money valuation.

The share price follows from the same numbers. The price per new share is the pre-money valuation divided by the number of shares in issue before the round. The investor's money buys that many shares at that price, and the percentages fall out exactly as the formula predicts.

So the investment amount is usually fixed, and the pre-money is the number you're really negotiating.

Worked example: same cheque, two meanings

Illustration only. The figures are made up to show the arithmetic.

You own all 1,000,000 shares. An investor says: "We'll put in £200,000 at an £800,000 valuation." That sounds clear, but it can mean two different things.

Same cheque, same headline number, but the post-money version costs you an extra 5 percentage points of your company. If the company later sold for £20 million, before any later rounds, 5% would be £1 million. A word you didn't clarify in a thirty-second conversation could be worth a lot.

Quoting post-money isn't sneaky. Some instruments are framed that way on purpose. Y Combinator's post-money SAFE, for example, is built around a post-money valuation cap. In the UK, early money often arrives through advance subscription agreements or convertible loans rather than a priced round, and each converts on its own terms. Our guide to convertible notes and SAFEs for UK founders explains how. Whatever the instrument, ask the same question every time: "Is that pre-money or post-money?"

The option pool shuffle

One more term catches founders out, and it hides inside the pre-money.

An option pool is a block of shares set aside for future employees. Many term sheets say something like "£800,000 pre-money, including a 10% post-money option pool". That means the pool is created before the investment, out of the pre-money. It dilutes you and any earlier shareholders, not the incoming investor.

Illustration only: the same £200,000 investment, with a 10% pool created either after the round (so everyone shares the dilution) or inside the pre-money.

With the pool inside the pre-money, the headline pre-money is still £800,000, but your 1,000,000 shares are priced at £0.70 each, which values them at £700,000. That gap is sometimes called the effective pre-money. It's the number to compare offers on.

You don't have to win this point, but you do have to see it. Ask: "Is the option pool inside the pre-money or the post-money?" Then size the pool to the grants you'll actually make before the next round, not a round number that sounds tidy.

Cap table scenarios: watch your slice move

Now follow one founder across two rounds and an option pool. Illustration only. The numbers are kept round so the pattern is easy to see.

Day one. You own 1,000,000 shares: 100%.

Pre-seed. You raise £200,000 at an £800,000 pre-money (£1,000,000 post-money). The price is £0.80 a share, so the company issues 250,000 new shares. You own 80%.

Option pool. Before the seed round, you create a pool equal to 10% of the company on a fully diluted basis: 138,889 shares. Pools are usually reserved rather than issued, so these shares are only issued as options are exercised, but investors count them. Everyone existing is diluted on a fully diluted basis to make room. You now own 72% fully diluted.

Seed. A year later you raise £1,000,000 at a £4,000,000 pre-money (£5,000,000 post-money). There are 1,388,889 shares on a fully diluted basis before the round, so the price is £2.88 a share and the company issues 347,222 new shares. The seed investor owns 20%, and everyone before them is diluted in proportion.

Across two rounds and one option pool, you went from 100% to 57.6%. That's a normal path, and the mistake isn't reaching it. The mistake is reaching it without realising, or with nothing to show for it.

Now look at value. After the pre-seed, your 1,000,000 shares were priced at £0.80, so your stake was worth £800,000 on paper. After the seed they're priced at £2.88, so your stake is worth £2.88 million on paper. Your percentage fell from 80% to 57.6%, and the paper value of your stake rose 3.6 times. That's the case for dilution in two numbers. Paper value only becomes cash if the company is sold or shares are bought, but the direction is what matters.

How much should you give away per round?

There's no law, but a commonly quoted rule of thumb is that founders give up around 10–25% per priced round, with seed rounds often in the 15–25% range. Give away much more than that early and you can run short of founder equity before the company is worth a lot, and an under-owned founder is a risk that later investors worry about.

The practical points:

• Raise the right amount, not the maximum. At a given valuation, every extra pound raised means more dilution. Raise what gets you to the next meaningful milestone plus a buffer. That's a runway question: work out how many months the money buys with our guide to calculating runway, or check your current burn with the free runway calculator.
• Push on valuation, but not too far. A higher pre-money is the biggest lever on how little you dilute. But a valuation you can't grow into risks a down round later, where new shares are sold at a lower price than before. That dilutes existing shareholders more and can reduce the value of their stakes.
• Read the investor protections. Some term sheets give investors anti-dilution protection, which compensates them if a later round is priced lower, usually at the expense of founders and other ordinary shareholders. Pro-rata rights let existing investors buy into later rounds to keep their percentage. Know what you're agreeing to.
• Watch the option pool. It dilutes you, and if it sits inside the pre-money it dilutes you rather than the new investor.

Recording the round properly

Once a round is agreed, the company allots the new shares, and the paperwork follows:

• Companies House. The company must deliver a return of allotment, form SH01, within one month of allotting the shares. Here's how to issue shares and file an SH01.
• Your books. The cash comes in, recorded as share capital (the shares' nominal value) and share premium (the rest of the price paid).
• SEIS and EIS. If investors are claiming relief, the company submits compliance statements so HMRC can authorise the certificates they need. See SEIS and EIS explained for founders.
• Your cap table. Update it the day the shares are allotted, and check it matches what you filed. See what a cap table is and how to keep yours clean.

Why investors care that you understand this

When an investor asks "where does this round leave you on the cap table?", they're checking two things: that you'll still own enough to stay motivated for years, and that you actually track your own ownership. A founder who can answer straight away, "this round takes me to about 58%, here's the cap table", signals control. A founder who guesses signals a mess that will surface in due diligence.

The same goes for "pre or post?" and "is the pool in the pre-money?". Asking those questions calmly marks you out as someone who will look after the cash carefully.

Where Ledgers fits

On the Growth plan, Ledgers keeps your cap table, funding rounds and SEIS/EIS alongside the books. For modelling ownership across future rounds before you agree terms, a careful spreadsheet still helps. When you close a round, Ledgers' funding rounds wizard records it in your books, prepares your SH01 for Companies House and schedules your SEIS and EIS compliance milestones. Before you agree terms, Plan lets you try a what-if such as "raise £500k" against your real numbers to see what it does to your cash and runway. Here's how it works for startups raising their first rounds.

The short version

Dilution is your slice of the company getting thinner because new shares were created to bring in money, or set aside to reward future staff. Your share count doesn't change; the total grows. Pre-money is the company's value before the investment, post-money is pre-money plus the investment, and the investor's percentage is always worked out on the post-money. Always ask which one is on the table, check where the option pool sits, and model every round before you agree to it.

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Raising soon? Start free and see what a raise does to your runway before you reply to the term sheet.

Frequently asked questions

What is equity dilution?

Dilution is the fall in your ownership percentage when a company issues new shares to raise investment, or sets shares aside for an employee option pool. Your number of shares stays the same, but it becomes a smaller slice of a larger total.

Does dilution mean I'm losing money?

Not usually. Your percentage falls, but if the company's value rises by more, your stake is worth more on paper. In this article's illustration, 80% of a £1m company becomes 57.6% of a £5m company, which is £2.88m rather than £800,000.

How much equity do founders typically give up when raising?

A commonly quoted rule of thumb is 10–25% per priced round, with seed rounds often in the 15–25% range. Giving away much more early can leave founders under-owned, which later investors see as a risk.

What's the difference between pre-money and post-money valuation?

Pre-money is the company's value before the new investment goes in. Post-money is its value afterwards, equal to pre-money plus the amount invested. The investor's percentage is worked out against the post-money figure.

How do I calculate post-money valuation?

Add the investment to the pre-money valuation. With a £800,000 pre-money and a £200,000 investment, the post-money is £1,000,000 and the investor owns £200,000 ÷ £1,000,000 = 20%.

Why does pre-money vs post-money matter so much?

Because the same cheque buys a different slice. £200,000 at a £800,000 pre-money buys 20% of the company, but at a £800,000 post-money it buys 25%.

Does the employee option pool dilute me?

Yes. A pool is usually reserved rather than issued: the shares are set aside and only issued when options are exercised. But it counts on a fully diluted basis, so it dilutes the founders' fully diluted ownership. If the pool is created inside the pre-money valuation, it dilutes the founders and earlier shareholders rather than the incoming investor.

Do I need to tell Companies House when I issue new shares?

Yes. A company must deliver a return of allotment (form SH01) to Companies House within one month of allotting new shares.

Tools and guides for this

• Ledgers for startupsRunway, SEIS/EIS and R&D, with investor-ready numbers.
• Free runway calculatorUpload a bank statement and see your burn and runway.
• R&D tax reliefWhat counts, and what HMRC now checks.

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