As a startup raises new funding rounds, founder and employee shares can be diluted, impacting ownership percentages and the value of each stake. While dilution is a natural part of growth, it’s crucial for founders to understand how it affects everyone with equity. In this post, we’ll explain the mechanics of dilution and provide strategies to manage it effectively.

What Is Dilution, and How Does It Work?
Dilution occurs when a company issues new shares, typically during funding rounds, which reduces the ownership percentage of existing shareholders. Although the absolute value of shares may increase as the company raises funds, the relative share percentage decreases.

Strategies to Manage Dilution

1. Preemptive Rights: Some agreements allow existing shareholders to maintain their ownership percentage by purchasing new shares during future rounds.
2. Option Pool Adjustments: Creating a clear option pool upfront and managing its allocation carefully over time can prevent excessive dilution of founder shares.
3. Transparent Communication: Regularly updating employees on potential dilution and its impact on their equity helps manage expectations and build trust.

While dilution is inevitable for many high-growth startups, careful planning can minimise its impact. Clear, strategic steps to protect equity reassure both founders and employees as the company expands.