Everyone's slice shrinks, if the pie grows faster
Dilution is the reduction in ownership percentage that happens whenever new shares are issued. Every investor from Lesson 13's seed round onward gets diluted at every later round, unless they exercise pro-rata rights to buy more (Lesson 18). Dilution isn't inherently bad, if the company's value is growing faster than the ownership percentage is shrinking, a smaller slice of a much bigger pie is still worth more in absolute terms.
Worked example: one company, four rounds
Same company from Lesson 13, tracked through seed, Series A, and Series B, with no follow-on participation from earlier investors.
| Holder | After Seed | After Series A | After Series B |
|---|---|---|---|
| Founders (combined) | 72% | 54% | 41% |
| ESOP pool | 10% | 12% | 13% |
| Seed investors | 18% | 13% | 10% |
| Series A investors | — | 21% | 16% |
| Series B investors | — | — | 20% |
| Total | 100% | 100% | 100% |
The seed investor's stake shrank from 18% to 10%, an ownership drop of nearly half. But if the company's valuation rose from $16m post-seed to $180m post-Series B, that same shrinking stake is worth roughly 5x more in dollar terms than it started, the reason experienced investors track dollar value, not just ownership percentage, across rounds.
Checkpoint
- Dilution: ownership percentage falling as new shares are issued at each round.
- Dilution isn't inherently bad if value grows faster than the stake shrinks.
- Always check dollar value, not just percentage, when assessing whether dilution hurt or helped an investor.
If anything here still feels unclear, ask before moving to Lesson 18.