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.