What is Share Dilution during Funding?

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💥 Learning Venture Capital & Startup Concept Series (Part 2) ⬇️⬇️

Super helpful to all the current & future Entrepreneurs + Finance/ Startup Enthusiasts !! 😀

Some VC job opportunities are mentioned at the end ...

📌 How Equity dilution occurs in startups??

Equity is simply the % ownership in a company.

Ex - Suppose A & B are two Co-Founders of a startup X. Let the total shares be 1000 such that A has 700 shares whereas B has 300 shares.

Then A has an equity of 70% whereas B has an equity of 30%.

📌 Equity Dilution is the reduction in the equity of the existing shareholders when any new shareholders join.

Ex - Let a new investor C comes into the company and takes a 10% equity in the company.

Then dilution occurs in this way -

A's equity will get diluted by 70% of 10 = 7%

B's equity will get diluted by 30% of 10 = 3%

So, new shareholding would be --

A has 63% (70-7), B has 27% (30-3) & C has 10%.

So the total is again 100% (63+27+10).

📌 Amount of dilution is directly proportional to the amount of equity present with a person.

To understand further,

Let another investor D come in next round of funding & takes 20% equity in the company.

Then dilution occurs in this way -

A's equity will get diluted by 63% of 20 = 12.6%

B's equity will get diluted by 27% of 20 = 5.4%

C's equity will get diluted by 10% of 20 = 2%

So, new shareholding would be --

A has 50.4% (63-12.6), B has 21.6% (27-5.4), C has 8% (10-2) & D has 20%.

So the total is again 100% (50.4+21.6+8+20).

This is the most simplified case discussed.

📌 There are ways through which Investor C can prevent its equity dilution when Investor D comes using ...

We will discuss them in future posts.

Do comment below with your thoughts about the above ...

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