Dilution

Your percentage of the company going down because new shares were issued. Not automatically a bad thing.

What it means

When a company issues new shares, existing shareholders own a smaller percentage of a larger company. That is dilution.

It is not the same as losing value. Owning 80% of a company worth £2m is better than owning 100% of one worth £500,000.

Why it matters

Founders focus on the percentage and investors focus on the value, and both are right about different things. The percentage matters for control and for the eventual proceeds; the value matters for whether the round was worth doing.

Successive rounds compound. Three rounds each diluting 20% leaves a founder with roughly half of what they started with, before any option pool.

What it looks like in practice

Model it before you agree the round. Take the pre-money valuation, add the investment, and divide.

Watch the option pool. Investors usually require it to be created before the investment — out of the existing shareholders' percentage rather than shared with the new money. This "pool shuffle" is standard and is worth understanding as part of the effective price.

What to watch out for

Anti-dilution provisions in favour of investors, which protect their percentage if a later round is at a lower price and increase the founders' dilution instead. Full ratchet is harsh; broad-based weighted average is more usual.

Pre-emption rights let existing shareholders maintain their percentage by taking part in a round. Waiving them casually gives away something valuable.

Where to get proper advice

A corporate solicitor on the documents and an accountant or adviser on the model. Do the model yourself as well — it is a spreadsheet, and the understanding is the point.