Dilution is one of those words that makes every founder pause during a funding round. Dilution isn’t something to fear, but if you don’t fully understand it, you might give up more control than intended.
Let’s demystify dilution, how it works, and what you should be watching for, especially in early-stage fundraising.
What Is Dilution?
Dilution happens when a startup issues new shares, typically during a funding round, which reduces the percentage ownership of existing shareholders.
Even though your number of shares stays the same, your ownership stake goes down because the pie just got bigger.
Simple Example
Imagine you’re a solo founder. You start your company and own 100% of it in the form of 10,000 shares.
Now you raise funding:
An investor gives you ₹2 crore and, in return, they should own 20% of your company.
But you don’t give them part of your 10,000 shares, instead the company issues new shares.
So how many shares does the investor need to own 20% of the company?
Here’s the intuitive way to think about it:
If 20% belongs to the investor, then you must own the remaining 80%.
So your 10,000 shares = 80% of the company.
That means the total number of shares must now be 12,500 (because 10,000 is 80% of 12,500).
So:
- You still have 10,000 shares
- The investor gets 2,500 new shares
- Total = 12,500 shares
- You now own 80% (10,000 / 12,500)
- The investor owns 20% (2,500 / 12,500)
This is how dilution works: your number of shares stays the same, but your percentage ownership goes down as more shares are added.
Is Dilution Always Bad?
No! in fact, dilution is necessary for growth.
You exchange equity for capital, strategic support, and the ability to move quicker.
The key is to dilute smartly, not blindly.
🧠 Rule of thumb:
Better to own 60% of a ₹100 crore company than 100% of a ₹1 crore company.
Indian Context: Why Dilution Strategy Matters
Many Indian founders raise too much, too soon or give away too much equity early on.
That creates problems later:
- Founders holding <10% by Series B
- New investors hesitant because cap table is crowded
- Harder to attract senior hires or advisors with no room left for ESOPs
Cap table health is crucial, especially in a conservative investor market like India.
Typical Dilution Across Funding Stages
| Stage | Dilution Range | Founder Holding (Typical) |
|---|---|---|
| Angel / Pre-Seed | 5–15% | 85–95% |
| Seed | 15–25% | 60–80% |
| Series A | 20–30% | 40–60% |
| Series B+ | 15–25% per round | 20–40% |
Note: These are estimates; actuals vary by traction, leverage, and round dynamics.
Key Areas Where Founders Get Diluted
- Equity fundraising (most obvious)
- ESOP pool expansion (usually 10–15% before/after rounds)
- Convertible notes / SAFEs converting into equity
- Advisor and early employee grants
- Liquidation preference misalignment (you make less at exit despite your shares)
Example: Managing Dilution Over Time
Let’s say you start with 100% and the valuation before any fundraise is 2 Cr:
- Angel round: raise ₹1 crore → dilute 10% → you hold 90%
- Seed round: raise ₹3 crore → dilute 20% → now you hold 72%
- Series A: raise ₹10 crore → dilute 25% → now you hold 54%
You’ve diluted, but if the company value has grown from ₹2 crore to ₹21.6 crore, your net worth grew ~10x.
Common Founder Mistakes
- Giving away too much early to friends/family without value return
- Not planning ESOPs in advance
- Chasing valuation at all costs, ignoring how much equity you’re losing
- Capping themselves out by Series B, leaving little incentive to stay long-term
How to Manage Dilution Smartly
- Model multiple cap table scenarios before signing any term sheet
- Think ahead 2–3 rounds, will your ownership still justify your role?
- Preserve ESOP pool early, don’t keep refreshing it every round
- Negotiate on dilution, not just valuation, i.e., “How much of my company am I selling?”
Pro tip: Focus on post-money dilution, not just pre-money valuation.
Final Thought
Dilution isn’t a setback, it’s how you gain fuel and momentum for the journey. Just make sure you stay behind the wheel.
Every founder will be diluted over time.
Your job is to:
- Know your thresholds
- Structure deals thoughtfully
- Stay aligned with the company’s upside
Because it’s not about how much you own, it’s about what you’re building, and what that ownership is worth when it matters.