Our Dilution Calculator helps founders and investors instantly calculate the impact of a new funding round on ownership percentages. Whether you are raising a Seed round or Series A, understanding how new shares dilute existing equity is crucial for maintaining a healthy cap table.
How to Use the Dilution Calculator
This tool simplifies the complex math of equity dilution into a few easy steps. It assumes a standard "pre-money" investment structure.
- Enter Current Shares: Input the total number of fully diluted shares outstanding before the new investment. This includes founder stock, employee options, and existing investor shares.
- Enter Investment Amount: Input the total amount of cash being raised in this round (e.g., $1,000,000).
- Enter Pre-Money Valuation: Input the agreed-upon value of the company before the new cash is added.
- Calculate: Click the button to see the new share price, the number of new shares issued, and the resulting ownership percentages.
Understanding Equity Dilution
Dilution occurs when a company issues new shares of stock, which decreases the percentage of ownership held by existing shareholders. While the percentage of ownership drops, the value of that ownership often increases if the company's valuation rises (this is known as an "up round").
Managing dilution is a key part of startup finance. Founders must balance the need for capital against the desire to retain control and economic upside. A well-managed equity calculator strategy ensures that all stakeholders are incentivized correctly.
Key Formulas
Our calculator uses standard venture capital formulas to determine the post-money cap table:
- Post-Money Valuation: The value of the company immediately after the investment.
Post-Money = Pre-Money Valuation + Investment Amount - Price Per Share: The price investors pay for each new share.
Price Per Share = Pre-Money Valuation / Current Outstanding Shares - New Shares Issued: The number of shares created for the new investors.
New Shares = Investment Amount / Price Per Share - Dilution Percentage: The percentage of the company sold to new investors.
Dilution = New Shares / (Current Shares + New Shares)
Example Scenario: Seed Round
Let's say you are a founder with 1,000,000 shares (100% ownership). You agree to raise $500,000 at a $2,000,000 pre-money valuation.
- Price Per Share: $2,000,000 / 1,000,000 = $2.00
- New Shares Issued: $500,000 / $2.00 = 250,000 shares
- Total Shares: 1,000,000 + 250,000 = 1,250,000 shares
- Your New Ownership: 1,000,000 / 1,250,000 = 80%
- Investor Ownership: 250,000 / 1,250,000 = 20%
In this scenario, you have been diluted by 20%, but your remaining 80% is now worth $2,000,000 (80% of the $2.5M post-money valuation), which is the same value as before the round. The value creation happens as you use that capital to grow.
Why Track Dilution?
Failing to track dilution can lead to "cap table shock" in later rounds. If you give away too much equity early on (e.g., 40% in a Seed round), you may not have enough equity left to incentivize employees or attract future investors in Series A or B.
Using tools like our percentage increase calculator can help you model growth scenarios, while our profit calculator can help you plan for sustainability.
Frequently Asked Questions
Deep Dive: Pre-Money vs. Post-Money Valuation
The distinction between pre-money and post-money valuation is the most critical concept in understanding dilution.
- Pre-Money Valuation: This is the value of the company before the new investment is added. It is based on the company's assets, intellectual property, team, and market potential. This number is negotiated between the founders and the investors.
- Post-Money Valuation: This is the value of the company after the investment is added. It is simply the pre-money valuation plus the amount of cash raised.
Why it matters: Investors calculate their ownership percentage based on the post-money valuation. If you raise $1 million at a $4 million pre-money valuation, the post-money is $5 million. The investors own $1M / $5M = 20%. If you mistakenly thought they owned $1M / $4M = 25%, you would be incorrect. The math always relies on the post-money figure.
The Impact of Option Pools
One of the biggest sources of "hidden" dilution for founders is the employee option pool. Investors almost always require a 10-20% option pool to be created before their investment (the "pre-money shuffle").
When the option pool comes out of the pre-money valuation, it dilutes the founders only, not the new investors.
Example:
You have a $4M pre-money valuation. Investors want a 10% post-money option pool.
If the pool is created pre-money, your "effective" pre-money valuation drops, meaning the price per share is lower, and you (the founder) take a bigger dilution hit. The investors still put in their $1M and get their 20%, but your stake is reduced by both the new investment and the option pool creation.
Anti-Dilution Provisions
In some cases, investors negotiate for anti-dilution protection. This protects them if the company raises money in the future at a lower valuation (a "down round").
- Full Ratchet: The most investor-friendly provision. If you sell shares later at a lower price, the original investors get their share price adjusted down to that new, lower price, effectively issuing them many more free shares to maintain their value. This can be devastating for founders.
- Weighted Average: The more common and fair approach. It adjusts the conversion price based on a formula that considers both the new lower price and the number of shares issued, softening the blow of a down round without completely wiping out common shareholders.
Convertible Notes and SAFEs
Early-stage startups often raise money using Convertible Notes or SAFEs (Simple Agreement for Future Equity). These are not equity yet. They convert into equity during the next priced round (e.g., Series A).
When these instruments convert, they usually have a valuation cap or a discount rate.
- Valuation Cap: Sets a maximum valuation at which the note converts. If your Series A valuation is $10M but the Note cap was $5M, the note holders convert as if the valuation was $5M, getting twice as many shares as the new Series A investors for the same price.
- Discount Rate: Gives note holders a discount (usually 20%) on the Series A share price.
This conversion event causes significant dilution for founders, often much more than anticipated. It is crucial to model these scenarios using a cap table calculator before signing the initial SAFE agreements.
Why Dilution is Necessary for Growth
Founders often fear dilution, viewing it as "losing" their company. However, dilution is the cost of capital. Without capital, most high-growth startups cannot hire, build product, or scale sales.
The "Smaller Slice, Bigger Pie" Analogy:
Would you rather own 100% of a grape or 10% of a watermelon?
If your company is worth $1 million and you own 100%, your net worth is $1 million. If you dilute yourself down to 10% but build a company worth $100 million, your net worth is $10 million. Smart dilution is a trade: you give up percentage points in exchange for resources that increase the value of the remaining points.
Related Tools
Managing a business involves more than just equity. Check out our percentage change calculator to track growth metrics, or use the investment calculator to project returns. For broader financial planning, our business loan calculator can help compare debt vs. equity financing.
For more information on securities and equity crowdfunding, read about valuation basics on Investopedia.
Conclusion
Understanding equity dilution is essential for any founder, early employee, or investor involved in startups. By using our Dilution Calculator, you can model funding scenarios, anticipate ownership changes, and negotiate better terms. Remember that dilution is not inherently negative—when managed strategically, giving up equity in exchange for capital can dramatically increase the absolute value of your remaining stake. The key is to plan ahead, understand the full implications of each funding round, and keep a clean, well-organized cap table that serves as the foundation for your company's growth trajectory.