Equity dilution: a glossary guide to definition, examples & impact

How equity dilution happens

Equity dilution occurs whenever the total number of shares increases. The number of shares you own might stay the same, but the denominator gets bigger.

Here are the most common ways dilution shows up in startups and private markets.

Issuing new shares

The classic moment: a funding round.

• A startup raises a Seed, Series A, or beyond.
  
  
• New investors get new shares in exchange for cash.
  
  
• Founders and existing investors retain the same number of shares, but they now represent a smaller percentage of the total.
  
  

This dynamic becomes especially important in later rounds, where valuation, investor rights, and dilution mechanics tend to be more complex, as outlined in what to look for before investing in late-stage private companies.

The upside? If the funding round increases the company’s valuation, your smaller slice might still be worth more in dollar terms. That’s the core tradeoff of equity dilution.

Employee stock options & option pools

Companies don’t just issue shares to investors. They also set aside shares for employees via an option pool.

• The option pool is a bucket of shares reserved for current and future hires.
  
  
• When the pool is created or expanded, the total share count increases.
  
  
• Everyone else: founders, early investors, existing employees get diluted a bit.
  
  

This is one of those “good problems.” Dilution from stock options is usually the price of attracting great people to help grow the company. For founders and early employees, understanding how option pools fit into long-term ownership planning is a core part of startup equity management best practices for long-term liquidity.

Convertible notes, SAFEs & other convertible instruments

Early-stage startups often raise money using convertible notes, SAFEs, or other convertible debt/equity.

At first, these don’t show up as shares. But later, usually at a priced round, they convert into equity:

• The note or SAFE holder’s investment turns into shares.
  
  
• New shares get created based on a valuation cap, discount, or both.
  
  
• Total shares increase, and everyone else’s percentage ownership decreases.
  
  

If you see a cap table with a big stack of convertibles, you should expect a noticeable wave of equity dilution when they convert. 

Secondary Share Sales

Secondary sales happen when existing shareholders sell their shares to new buyers.

• No new shares are created in a pure secondary transaction.
  
  
• The total share count stays the same, so there’s no direct equity dilution.
  
  

However, secondary sales can still shift control and influence. A new investor buying a significant secondary stake might gain board seats or voting power, even without increasing the total number of shares. These ownership shifts are a key reason investors pay close attention to secondary market dynamics, which are explored further in key benefits of investing in secondary markets.

Example of equity dilution

Let’s walk through a simple equity dilution example.

Before funding (Pre-money):

• The company has 100 shares.
  
  
• Two founders each own 50 shares.
  
  
• Ownership: Founder A 50% (50/100), Founder B 50% (50/100).
  
  

New funding round:

• An investor puts in cash and receives 50 new shares.
  
  
• Total shares after the round: 150.
  
  

After funding (Post-money):

• Founder A: 50 shares → 33.3% (50/150).
  
  
• Founder B: 50 shares → 33.3% (50/150).
  
  
• New investor: 50 shares → 33.3% (50/150).
  
  

Each founder’s ownership dropped from 50% to about 33%.

Is that bad? Not necessarily. If the round values the company much higher than before, a smaller percentage of a much larger company can leave you better off financially. This same math plays out at exit, where dilution, valuation, and timing all converge, as explained in what really happens when a startup IPOs.

This is why every good equity dilution example should look at both percentage ownership and company valuation.

Why companies choose to dilute equity

If dilution means giving up ownership, why would any sane founder agree to it? Because in most cases, dilution is fuel for growth.

Common reasons companies choose to dilute equity:

• Raise capital for growth
  
  
  
  • Hiring, product development, go-to-market, and acquisitions.
    
    
• Attract and retain talent.
  
  
  
  • Expanding an employee option pool to bring in key hires.
    
    
• Convert early financing
  
  
  
  • Turning convertible notes or SAFEs into shares during a priced round.
    
    
• Restructure ownership
  
  
  
  • Bringing in strategic investors or cleaning up messy early cap tables.
    
    

In short, companies accept equity dilution when the capital, talent, or strategic value they get in return is expected to grow the pie faster than the slice shrinks.

Impact of equity dilution

Dilution hits different groups in different ways. Understanding this helps you read cap tables and term sheets with clear eyes.

For founders

• Less control: Lower percentage ownership can mean less voting power over time.
  
  
• Board dynamics: New investors often seek board seats or other governance rights.
  
  
• Upside math: Your share of a potential exit shrinks in percentage terms, but may grow in dollar terms if the company scales.

Good founders play the long game. They’d rather own 10–20% of a breakout success than 80% of something that never got funded.

For employees

• Options can get diluted: When new shares are issued, your options typically represent a smaller percentage of the company.
  
  
• But value can rise: If the funding round increases the company’s valuation, your diluted equity can still become more valuable.
  
  
• Refreshers matter: Strong companies often grant refreshers or new equity to keep employees aligned and motivated.

If you’re an employee, ask what the fully diluted ownership of your options looks like today and after planned future rounds.

For investors

• Reduced ownership: Each new round can dilute earlier investors.
  
  
• Pro rata rights: Many investors negotiate the right to invest in future rounds to maintain their percentage.
  
  
• Return math: If valuation doesn’t grow fast enough, too much equity dilution can weaken overall returns.

Sophisticated investors model multiple rounds of equity dilution before deciding whether a deal makes sense. Retail or crowdfunding investors should adopt the same mindset.

How to calculate equity dilution

Let’s simplify the calculation of equity dilution.

The basic idea:

New Ownership % =  Your Existing Shares  ÷  (Existing Shares + New Shares Issued)

Example:

• You own 20,000 shares.
  
  
• The company has 100,000 total shares. So you currently own 20% (20,000 / 100,000).
  
  
• The company issues 50,000 new shares in a funding round.
  
  
• New total shares = 150,000.
  
  

Your new ownership percentage:

• 20,000 ÷ 150,000 = 0.1333 → 13.33%.
  
  

So, your ownership goes from 20% to 13.33%.

To estimate equity dilution, you can look at the drop in ownership percentage:

• Dilution = Old % – New % = 20% – 13.33% = 6.67 percentage points.
  
  

Modern cap table tools and platforms handle this math automatically, but it’s helpful to understand the logic behind the numbers. That’s especially true if you’re reviewing deals on platforms like the Augment marketplace or Collective.

Because this is such a key concept, you’ll see “how to calculate equity dilution” come up again and again in investor education content, term sheets, and cap table models.

How to prevent or manage dilution

You can’t completely avoid equity dilution if a company is raising capital and growing. But you can be smart about preventing equity dilution from getting out of hand and managing the risk.

1. Negotiate anti-dilution protections

Investors sometimes negotiate anti-dilution clauses, especially in venture deals. These can adjust the conversion price of preferred shares if a future round happens at a lower valuation.

Common structures:

• Full ratchet: Treats the investment as if the investor had invested at the new, lower price.
  
  
• Weighted average: Blends old and new prices to soften the impact.
  
  

These protect investors more than founders or employees, so they’re typically reserved for large checks and later stages.

2. Plan option pools carefully

A sloppy option pool can cause painful equity dilution.

• Size the pool based on a realistic hiring plan, not just a round number.
  
  
• Avoid constantly “topping up” the pool in ways that surprise existing shareholders.
  
  
• Expect that new investors may ask for an increase in the option pool before their money comes in, effectively pushing dilution onto founders and early holders.
  
  

3. Focus on growing valuation

The best defense against painful dilution is building a more valuable company.

If each funding round significantly increases valuation, the economic value of your stake can rise even as your percentage falls. That’s the entire logic of venture-backed growth.

4. Use secondary markets thoughtfully

If you’re a founder, employee, or early investor, secondary liquidity can help you de-risk without forcing a large primary round that would cause more dilution. This approach is commonly used by accredited investors navigating private ownership transitions, as explained in how accredited investors are unlocking liquidity in the pre-IPO market.

Platforms like the Augment Collective and curated lists like The Power 20 can help investors and shareholders discover opportunities in private markets and navigate ownership shifts over time.

When people talk about “preventing equity dilution,” what they really mean is managing it intelligently, balancing ownership with growth, liquidity, and opportunity.

What equity dilution means for investors

If you’re investing in startups or private companies, whether directly, via crowdfunding, or through fintech apps, understanding equity dilution is non-negotiable. That understanding starts with knowing who can access these opportunities under U.S. rules, which is covered in Regulation D: accredited investors — who qualify and why it matters.

Here’s what to keep in mind:

• Dilution is standard: Almost every growing company issues new shares.
  
  
• Terms matter: Look for pro rata rights, anti-dilution provisions, and the size of the option pool.
  
  
• Model a few rounds: Assume multiple future rounds and see how your ownership might change.
  
  
• Link value to outcome: Dilution only really “hurts” if the company’s value doesn’t grow enough to compensate.

Before investing, it’s smart to review company disclosures from trusted sources like the SEC and educational resources from FINRA if you’re in U.S. markets.

Final Thoughts

Equity dilution is not automatically good or bad. It’s simply what happens when new people join the cap table, and the ownership pie gets sliced more ways.

For founders, employees, and investors, the real question is: Does this dilution help the company grow enough to make everyone better off?

When you understand how equity dilution works, how to calculate it, and how to manage or prevent excessive dilution, you’re far better equipped to make wise decisions in private markets.

Ready to go deeper? Explore live deals and company insights on the Augment marketplace, connect with other investors in the Collective, and keep an eye on standout opportunities in The Power 20.