– Definition of Dilution: Equity dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders.
– Investment Rounds: Startups often raise funds in multiple rounds (seed, Series A, etc.), leading to new shares being issued to investors.
– Ownership Impact: For example, if a startup has 1,000 shares and issues 500 new shares, existing shareholders now own a smaller percentage.
Valuation Considerations: New investments may increase the company’s valuation, potentially benefiting existing shareholders despite dilution.
– Preemptive Rights: Some shareholders have preemptive rights, allowing them to buy additional shares in new rounds to maintain their ownership percentage.
Long-Term Growth: While dilution reduces ownership percentage, the goal is to raise capital for growth, which can increase the overall value of shares over time.