When a company sells or gives away equity to investors, employees or advisors, it issues new shares. Through this practice, the existing shareholders end up owning a reduced proportion of the company, despite not selling any of their own shares during the funding round. This outcome is known as ‘Dilution’. See also Anti-Dilution Clause.
Ie: Founder 1 – owns 50k shares or 50%
Founder 2 – owns 50k shares or 50%
New investor – “buys” 25k shares or 25% of NEW SHARES
Total shares outstanding = 125k
Founder Shares / Total Shares outstanding = 50k/125k = 40%
Dilution is now at 10% for each Founder.
