Navigating Dilution and Ownership in Startup Fundraising

#02- Understanding Dilution: How Startup Funding Impacts Founder Equity.

Startup fundraising can be a complex and challenging process, especially when it comes to dilution and the resulting impact on founder and company ownership. However, with a deep understanding of how dilution works and careful planning, founders can maintain control of their company and stay true to their vision while still securing the funding they need to succeed. By unlocking the secrets of startup fundraising, founders can ensure that they are well-equipped to navigate the challenges and emerge victorious in their entrepreneurial journey.

This blog will help you understand dilution in a more nuanced manner.

---

Subscribed to “The Venture Crew” newsletter to receive daily updates on startups, venture capital, startup investing and vc jobs.

---

In simple words, Dilution is the reduction in shareholders' equity positions due to the creation of new shares i.e. addition of new shareholders like investors. Let's understand the whole story with one example (with some assumptions):

Suppose -

The founder's pre-raise equity value (PEV) = 100% or 1

Employed Stock Option Pool (ESOP) = 15% or 0.15

The pre-money valuation of the company = $4M and an investor is willing to put $1M in this startup.

So,

% of equity dilution = Investment Amount / (Pre-money valuation + Investment Amount)

So - In this case - % of equity dilution = $1M / ($4M + $1M) = 0.20 * 100 = 20%

So, 20% of equity will be diluted (will get to the investor) from the total equity that the founder has.

So, let's calculate the current equity founder have after raising funds.

Total Founder Ownership Factor (TFOF) =

(1 - 0.15 (ESOP)) * (1 - 0.2 (equity dilution)) = 0.68 = 68% (Ownership of founder).

Hence , Dilution = (1-0.68) = 0.32 = 32% (This is for the ESOP & Investors)

I hope this article helped you understand the dilution for startup founders after raising a fund from any investors.

While raising your early funding for your startup, make sure to do your own calculation this will give you more conviction while talking with investors.

Today’s VC Job:

• Venture Capital Fellow - Braven Venture - Remote Role - Apply

• VC Intern - First Momentum Venture - Remote Role - Apply

• Partner - a16z - Remote Role - Apply

Also, don't forget to join our Slack community, The Venture Crew, to connect with like-minded startup enthusiasts and founders.

Subscribed to “The Venture Crew” newsletter to receive daily updates on startups, venture capital, startup investing and vc jobs.

By - The Venture Crew!