Dilution: what happens to your ownership when you raise
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- 1.Convertible notes and SAFEs explained for UK founders
- 2.Dilution: what happens to your ownership when you raise
Dilution is what happens to your slice of the company when you issue new shares to raise money. Here's the plain-English version — with cap table scenarios — and why a smaller slice of a bigger pie is usually the point.
The word that makes founders flinch
The first time someone tells you that raising money means "getting diluted," it lands like a threat. You built this thing. You own it. And now you're being told that taking investment will shrink what you own.
That's true. But it's only half the story, and the missing half is the one that matters. Dilution isn't money being taken from you — it's you deciding that a smaller slice of a much bigger company is worth more than a big slice of a small one. Done right, it's the trade that makes you rich. Done blindly, it's how founders wake up at Series B owning less than they assumed.
Let's make it concrete enough that you never flinch at it again.
What dilution actually is
Your company has a fixed number of shares — say 1,000,000, and you own all of them. That's 100%.
To raise money, you don't sell your existing shares (that would be you cashing out, which isn't what's happening). Instead, the company creates brand-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.
Dilution is your slice getting thinner because the pie got cut into more pieces.
Think of a pizza. You have the whole pizza — eight slices, all yours. A hungry friend wants in and offers to pay for a bigger pizza. So you re-slice into ten. You still have your eight slices; nobody took any food off your plate. But you now own eight-tenths, not eight-eighths. You got diluted. The catch — and the point — is that the pizza is bigger now, and there's cash in the bank that wasn't there before.
The maths is one line
After a round, your new ownership is simply:
Your shares ÷ the new total number of shares.
Nothing was subtracted from you. The denominator just grew. This is why dilution and valuation are joined at the hip: the higher your valuation, the fewer new shares you have to issue to raise the same money, and the less your slice thins. (See: Pre-money vs post-money valuation explained simply.)
Cap table scenarios: watch your slice move
Here's where it gets real. Let's follow one founder — you — across three funding events and watch the percentage move. We'll keep the numbers round so the pattern is obvious.
Day one. You own 1,000,000 shares. That's 100%.
Round 1 — the pre-seed. You raise £200k at a £800k pre-money (£1m post-money). The investor gets 20%. To give them 20%, the company issues 250,000 new shares, bringing the total to 1,250,000.
- Your shares: 1,000,000 (unchanged)
- New total: 1,250,000
- You now own 80%. The investor owns 20%.
The option pool. Before the next round, you carve out a 10% option pool — shares set aside for future hires (employees you'll want to reward with equity). Say that adds shares to bring the pool to 10% of the company. Everyone existing gets diluted to make room.
- You drop from 80% to roughly 72%. The pool now holds ~10%, your pre-seed investor drops to ~18%.
Round 2 — the seed. A year later you raise £1m at a £4m pre-money (£5m post-money). The new investor gets 20% of the company. Everyone before them — you, your first investor, the option pool — gets diluted by that 20% in proportion.
- You drop from ~72% to roughly 58%.
- First investor: ~18% → ~14%
- Option pool: ~10% → ~8%
- New seed investor: 20%
So across two rounds and one option pool, you went from 100% to about 58%. That's normal. That's healthy, in fact. The mistake isn't getting to 58% — it's getting there without realising, or getting there with nothing to show for it.
And notice the other side of the ledger: in Round 1 your company was worth £1m, so your 80% was worth £800k. After Round 2 the company is worth £5m, so your 58% is worth about £2.9m. Your percentage fell. Your wealth more than tripled. That's the entire case for dilution in two numbers.
How much should you give away per round?
There's no law, but there's a well-worn rule of thumb: founders typically part with somewhere around 10–25% per priced round, with seed rounds often clustering in the 15–25% range. Give away much more than that early and you can run out of "founder equity" before the company is big enough to be worth a lot — and an under-owned founder is a flight risk that later investors actively worry about.
The practical takeaways:
- Raise the right amount, not the maximum. Every extra pound raised at a given valuation is more dilution. Raise what gets you to the next meaningful milestone plus a buffer — not a war chest "just in case." (This is exactly why runway matters: What is runway and how do I work out mine?)
- Push on valuation, not just on the cheque. A higher pre-money is the single biggest lever on how little you dilute.
- Watch the option pool. It dilutes you, and if it's carved out of the pre-money it dilutes you alone. Size it to what you'll actually grant before the next round, not a round number that sounds tidy.
Why investors care that you understand this
When an investor asks, "Where does this round leave you on the cap table?", they are not testing your maths for fun. They're checking two things: that you'll still own enough to stay motivated through the next few years, and that you actually track your own ownership. A founder who can answer instantly — "this round takes me to about 58%, here's the cap table" — signals control. A founder who guesses signals a mess waiting to surface in due diligence.
This is the founder-facing reality of dilution: it's not just a number that happens to you. It's a number you're expected to manage, model, and explain. The ones who do it well treat their cap table as a living model they update with every offer, not a spreadsheet they dig up in a panic when a term sheet arrives. (See: What is a cap table and how do I keep mine clean?)
The short version
Dilution is your slice of the company getting thinner because new shares were created to bring in money or to reward future staff. Your share count doesn't drop — the total just grows, so your percentage falls. Across a couple of rounds, going from 100% to roughly half is normal and usually means your stake is worth far more in pounds, even as the percentage shrinks. The skill isn't avoiding dilution. It's choosing it deliberately, modelling every round before you agree it, and always knowing exactly where you stand.
Raising soon? In Ledgers, your cap table is a live model — try a round before you agree it and see exactly where the new shares and option pool leave your ownership, then share a clean, DD-ready cap table with investors in a click. Model your dilution before you sign → start free.
First, get the lever that drives it: Pre-money vs post-money valuation explained simply →
And the view investors check first: What is a cap table and how do I keep mine clean? →
Frequently asked questions
What is equity dilution?
Dilution is the reduction in your ownership percentage when a company issues new shares — usually to raise investment or to create 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, the cash value of your stake goes up. Owning 58% of a £5m company is worth far more than 100% of a £200k one.
How much equity do founders typically give up when raising?
Roughly 10–25% per priced round is common, with seed rounds often in the 15–25% range. Giving away much more this early can leave founders under-owned, which later investors view as a risk.
Does the employee option pool dilute me?
Yes. Creating an option pool issues new shares, which dilutes existing shareholders. If the pool is carved out of the pre-money valuation, it dilutes the founders specifically rather than the incoming investor.
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