What is Share Dilution during Funding?
Madhur Jain
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?? How Equity dilution occurs in startups??
Equity is simply the % ownership in a company.
Ex - Suppose A & B are two Co-Founders of a startup X. Let the total shares be 1000 such that A has 700 shares whereas B has 300 shares.
Then A has an equity of 70% whereas B has an equity of 30%.
?? Equity Dilution is the reduction in the equity of the existing shareholders when any new shareholders join.
Ex - Let a new investor C comes into the company and takes a 10% equity in the company.
Then dilution occurs in this way -
A's equity will get diluted by 70% of 10 = 7%
B's equity will get diluted by 30% of 10 = 3%
So, new shareholding would be --
A has 63% (70-7), B has 27% (30-3) & C has 10%.
So the total is again 100% (63+27+10).
?? Amount of dilution is directly proportional to the amount of equity present with a person.
To understand further,
Let another investor D come in next round of funding & takes 20% equity in the company.
Then dilution occurs in this way -
A's equity will get diluted by 63% of 20 = 12.6%
B's equity will get diluted by 27% of 20 = 5.4%
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C's equity will get diluted by 10% of 20 = 2%
So, new shareholding would be --
A has 50.4% (63-12.6), B has 21.6% (27-5.4), C has 8% (10-2) & D has 20%.
So the total is again 100% (50.4+21.6+8+20).
This is the most simplified case discussed.
?? There are ways through which Investor C can prevent its equity dilution when Investor D comes using ...
We will discuss them in future posts.
Do comment below with your thoughts about the above ...
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1 年Excellent share Madhur Jain
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1 年Such an informative post Madhur Jain
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