TL;DR
Dilution is the reduction in your ownership percentage that happens every time your company issues new shares, whether that's a new funding round, an option grant, or a SAFE converting.
What dilution means
As total shares outstanding grows, your fixed number of shares becomes a smaller slice of a bigger pie. Every round dilutes founders and every existing shareholder proportionally, unless they hold specific anti-dilution or pro-rata protection. It's the mechanical consequence of selling equity for cash: you can't raise money without giving away a piece of the company.
Dilution compounds across rounds too. A founder who starts at 100% ownership and takes several rounds of financing, each with its own dilution hit, needs to track the cumulative effect, not just what any single round costs in isolation.
Why it matters for African founders
Stacking multiple SAFEs at pre-seed before a priced round is common practice in Lagos and Nairobi, given how funds like Microtraction and Ventures Platform write early cheques. Each SAFE, once it converts, dilutes the founder alongside every other shareholder, so a founder's real ownership after a seed round is often meaningfully lower than a quick mental estimate would suggest.
Common mistakes founders make with dilution
- Not modelling fully diluted ownership before signing a new SAFE or priced round
- Forgetting that employee option pool expansion, often negotiated as part of a Series A term sheet, also dilutes founders
- Treating each round's dilution in isolation instead of tracking the cumulative effect across every round
- Assuming dilution only happens at priced rounds, when SAFE conversions dilute too
FAQ
How much dilution is normal per round?
It varies by round size and valuation, and there's no fixed percentage that applies across every deal, so model your specific numbers rather than relying on a rule of thumb.Does dilution only happen when you raise money?
No, option pool expansions and SAFE conversions also dilute existing shareholders, even without a new priced round happening.Can you avoid dilution entirely while raising equity capital?
Not if you're raising equity capital, though you can manage its pace by raising only what you actually need and negotiating cap sizes carefully.See also
- Cap table
- Pro-rata rights
- SAFE note
- Valuation
- Microtraction, whose $100K-for-7%-equity pre-seed cheque is a concrete example of an early dilution trade