What is equity dilution?
Dilution is the reduction in a shareholder's ownership percentage when a company issues new shares — typically to bring in fresh capital from investors or to top up the ESOP pool for new hires. The total number of shares grows, so each existing shareholder's slice of the pie gets thinner. The pie itself, ideally, gets bigger because the new capital funds growth — that's why dilution can be a perfectly healthy trade.
How dilution stacks across rounds
The math is multiplicative, not additive. If you give up 20% in your seed round and another 20% in Series A, you don't end at 60% — you end at 64%. (100% × 0.8 × 0.8 = 64%.) Founders who don't internalise this often agree to a generous Series A, then panic at Series B when ESOP top-ups, secondary sales and another priced round take them well below 50%. Stacking three rounds at 20% each lands you at roughly 51% before ESOP top-ups even start.
Typical dilution per stage
- Pre-seed / angel: 5–15% (often via SAFE or convertible note).
- Seed: 15–25%.
- Series A: 15–25%.
- Series B onwards: 10–20% per round.
- ESOP top-ups: typically add another 5–10% per round.
Founder vs investor incentives
Investors prefer pre-money ESOP top-ups because the dilution comes entirely from existing holders — the founders. Founders prefer post-money top-ups because then everyone (including the new investor) shares the dilution. This is one of the most quietly expensive lines in any term sheet, and it almost always lives in the small print. A 10% pre-money top-up before a 25% Series A can cost founders an additional 7–8% of the company versus a post-money structure.
Warnings about over-dilution
By Series B, founders typically own 30–50% of their company. By Series C, often 20–35%. If founders dip below 20% before reaching a meaningful exit milestone, two problems show up. First, downstream investors get nervous about whether the founders still have enough skin in the game. Second, secondary sales and bridge rounds become much harder to negotiate from a position of weakness. The fix is not to avoid dilution — it's to make sure every round buys you a step-change in valuation that more than offsets the percentage given up.
How to use this tool
Start with your real cap table today, then model the next 2–3 rounds you think are likely. Try optimistic and pessimistic versions of each round. Pay close attention to the ESOP top-up: a 10% top-up at Series A is one of the single biggest dilution events most founders experience, and it's often the one they negotiate the least.