What it calculates

Dilution modelling shows what happens to each existing shareholder's ownership when new shares are issued - in a funding round, on option exercise, or when convertible instruments turn into equity. It answers the question every founder and early investor actually cares about: what percentage do I hold after this.

How it is calculated

Start from the fully diluted share count, which includes outstanding options and the unallocated pool, not just issued shares. Add the new shares created by the round: investment amount divided by price per share. Each existing holder's new percentage is their unchanged share count divided by the new, larger total. Where the option pool is topped up pre-money, that top-up dilutes existing holders and not the incoming investor.

How to read the result

The headline dilution number understates the damage when a pool top-up is included in the pre-money valuation, which is the market norm. Compare your ownership before and after on a fully diluted basis, and check the effective price the round implies for existing holders once the pool expansion is accounted for. That effective price is often meaningfully below the headline price.

Worked example

You hold 4,000,000 of 10,000,000 fully diluted shares, so 40%. A round issues 2,500,000 new shares at 4.00 for 10,000,000 raised. The new total is 12,500,000 and your stake falls to 32%. If the round also required a 1,000,000-share pool top-up taken pre-money, the total becomes 13,500,000 and your stake is 29.6%.

Common questions

What is the difference between pre-money and post-money option pools?

A pre-money pool is carved out of the existing shareholders before the investment lands, so founders and prior investors absorb all of it. A post-money pool is created after, so the new investor shares the cost. Pre-money is far more common and is worth negotiating explicitly.

Does dilution always reduce the value of my stake?

No. Dilution reduces your percentage, not necessarily your value. If the capital raised grows the company by more than the percentage you gave up, you own a smaller slice of a larger pie and come out ahead. Down rounds are where percentage and value fall together.

Should convertible notes be included in the fully diluted count?

Yes, at their expected conversion terms including any discount or valuation cap. Leaving them out makes the pre-round ownership look better than it is and produces a dilution figure that will surprise everyone at conversion.