Financial Glossary
Dilution
Dilution occurs when a company issues new shares, reducing each existing shareholder's ownership percentage and, often, their proportional claim on earnings and voting rights. It is measured as the percentage decrease in an existing holder's stake: if a founder owns 1,000 of 10,000 shares (10%) and the company issues 2,500 new shares, the founder now holds 1,000 of 12,500 shares (8%). Dilution can arise from equity fundraising rounds, employee stock option pools, convertible note conversions, and warrant exercises.
Problem & Application
Consider a startup that has raised a seed round at a $4M post-money valuation, with founders holding 80% and seed investors holding 20%. A Series A at $10M pre-money brings in $3M, creating 30% new ownership for Series A investors. Founders drop to roughly 56% post-round. If an employee option pool of 10% was added before the round (a common investor ask), founder dilution is steeper still. Tracking dilution on a fully diluted cap table, which includes all issued shares, options, warrants, and convertible instruments as if exercised, lets founders model scenarios before signing a term sheet. For PE-backed campground roll-ups or STR operators taking on growth capital, understanding dilution vs. the value added by fresh capital is the core tradeoff fractional-CFO advisors help owners evaluate.
In Short
Companies should strategize fundraising efforts to minimize dilution while securing necessary capital.