Dilution refers to the reduction of an individual shareholder’s ownership percentage in a company as a result of the issuance of new shares. It can occur when a company raises additional capital through the sale of new equity, such as through a financing round.
When a startup raises capital, it is important for the founders and other shareholders to understand the impact of dilution on their ownership stakes. Dilution can have both positive and negative effects, depending on the circumstances.
On the positive side, dilution can provide the company with the capital it needs to grow and achieve its goals. It can also bring in new investors who can provide valuable expertise and resources.
On the negative side, dilution can reduce the ownership percentage and potential returns of existing shareholders. This can be especially impactful for founders and early stage investors who have a large ownership stake in the company.
To mitigate the negative effects of dilution, founders can consider negotiating terms such as a higher valuation or a larger ownership percentage in the new financing round. It is also important for founders to have a clear understanding of the company’s long-term growth strategy and the potential future value of their equity.