Startup Dictionary
Dilution
Definition
A reduction in the ownership percentage of a share of stock caused by the issuance of new shares.
Deep Dive
Dilution, in the context of business and finance, refers to the reduction in the ownership percentage of an existing shareholder's stock due to the issuance of new shares. When a company issues additional shares—whether to raise capital in a new funding round, compensate employees with stock options, or facilitate an acquisition—the total number of outstanding shares increases. Consequently, each existing share represents a smaller percentage of the company's total equity, even if the absolute number of shares owned by an individual remains unchanged.
Examples & Use Cases
- 1A founder initially owns 100% of their company. After a seed round where new shares are issued to investors, their ownership percentage might drop to 70%, even though their original share count hasn't changed.
- 2An employee's 1% ownership stake is diluted to 0.8% after the company completes a Series B funding round, which significantly increases the total number of shares outstanding to accommodate new investors.
- 3A company issues a new pool of stock options to attract and retain key talent, which dilutes the ownership percentage of all existing common and preferred shareholders.
Related Terms
EquityValuationCap TableStock OptionsPre-Money ValuationPost-Money Valuation