The SEC glossary defines dilution as “a reduction in the value of a shareholding due to the issue of additional shares in a company without an increase in assets”. A fairly simple concept to understand and top of mind for founders and investors alike. Essentially, dilution occurs when a company issues new shares of stock, which can dilute the ownership stake of the current shareholders. This can happen in a variety of situations, such as when a company raises new funding, grants employee stock options, or engages in acquisitions.

One of the key factors that can affect dilution is the valuation of the company at the time the new shares are issued. If the valuation is lower than the previous valuation, dilution can be more significant for existing shareholders. On the other hand, if the valuation is higher, dilution may be less impactful. It's important for founders to understand dilution and consider its potential impact on their ownership stake in the company. While the concept itself is quite innocuous, the math around dilution can get quite tricky – especially in situations where capital is raised via instruments issued at a discount to the next round valuation or when anti-dilution or liquidation preference covenants kick in.

We have put together an editable excel template that serves as a great numerical example to understand the concepts while enabling founders to quickly get on top of the exact cap table implications of any investment or liquidity event.