Cap table & dilution
Dilution
The reduction in your percentage ownership when a company issues new shares — a mathematical certainty in venture that reduces your slice while, in a good outcome, increasing its value.
In plain English
Every time a company issues shares, everyone who already holds shares owns a smaller fraction of a company that now has more cash or more employees. Your number of shares does not change; the denominator does. This is not a failure of your position, it is how the model works.
The distinction that matters is between dilution that pays for itself and dilution that does not. Selling 20% of the company for money that triples its value leaves you better off despite owning less. Issuing shares to solve a problem created by earlier mistakes — a down round, a repriced option pool, an anti-dilution ratchet — leaves you worse off in both terms. Angels who describe all dilution as bad have not separated these two cases.
Cumulative dilution over a full company lifetime is larger than most first-time investors expect. A seed investor going through Series A, B, C and D, with an option pool refreshed at each, will typically retain somewhere between a third and a half of their original percentage by exit. Rough planning arithmetic: assume you keep about half.
The only structural defences are pro-rata rights, which let you buy your way out of dilution by continuing to invest, and anti-dilution provisions, which apply only in a down round and only if you hold shares that have them.
What it means for your cheque
Model dilution before you invest, not after. Take your entry percentage, apply four rounds of roughly 20% dilution each, and see what you hold at exit. That number, multiplied by a plausible exit value, is your actual expected outcome — and it is usually about half of what the entry percentage suggested.
This arithmetic is the strongest argument for pro-rata rights and the strongest argument against paying a high cap. You cannot control how many rounds the company raises; you can control what you pay to get in and whether you have the right to keep up.
Do the arithmetic
A 2% seed stake through four rounds
You buy 2.0% at seed and do not follow on. Each subsequent round sells roughly 20% of the company, with an option pool top-up along the way.
| At seed | 2.00% |
|---|---|
| After Series A (20% dilution) | 1.60% |
| After Series B (20%) | 1.28% |
| After a 5% option pool refresh | 1.22% |
| After Series C (18%) | 1.00% |
| After Series D (15%) | 0.85% |
| Value at a $500m exit | about $4.25m |
| What 2.0% would have been worth | $10m — the difference is dilution |
You kept 42% of your original percentage, which is normal. A $25,000 cheque still returned about $4.25m, which is why the model works despite the dilution — but plan on the 0.85%, not the 2%.
At the table
What to negotiate
- Secure pro-rata rights at entry, in the main document or a side letter. Retrofitting them is very difficult.
- Reserve capital for follow-ons at the point you make the first investment — typically one to two times the initial cheque.
- Ask where the option pool sits in the round arithmetic; pool top-ups are dilution that is easy to overlook.
- Understand that a high entry cap plus normal dilution requires an implausibly large exit. Do the arithmetic before agreeing the cap.
- Do not fight ordinary dilution from a well-priced round. Fight the price you pay and the rights you get.
Dilution: common questions
Is dilution always bad for me?
How much dilution should I expect in total?
Can I avoid dilution entirely?
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