Dilution (Equity Dilution)
The reduction in existing shareholders' ownership percentage that occurs when a company issues new shares.
Definition
Dilution occurs when a company issues additional shares, causing existing shareholders' ownership percentages to decrease. While the absolute number of shares owned doesn't change, the relative ownership percentage decreases as the total number of outstanding shares increases.
Common Causes
- • New investment rounds (Series A, B, C, etc.)
- • Employee stock option grants and exercises
- • Convertible note or SAFE conversions
- • Warrant exercises
- • Stock-based acquisitions
- • Additional founder or advisor equity grants
Real-World Example
Founder Dilution: Founder owns 1M shares out of 4M total (25% ownership)
After Series A adds 1M new shares, founder still owns 1M shares but now out of 5M total (20% ownership) - diluted by 5 percentage points.