When you add water to an espresso shot, you dilute it (and create an Americano!).
When a VC-backed startup raises a new round, that is most commonly accomplished by the sale of new shares to parties participating in the new round. This dilutes the ownership of existing shareholders.
Working with the visual of a Cap Table, this involves creating a new block (representing new shares), and allocating them to investors in a new iteration of the cap table.
Any party who does not receive shares to maintain their % ownership in the new structure is diluted by a fund-raise.
If a company is in a “stronger” position at fundraise (i.e. they can afford to shop around for more favorable terms), they can command dilution on the lower range.
There are plenty of messy details involved in why, when, and how dilution occurs. If you’re interested in reading more on this topic,
According to that page, dilution at each stage varies from 10-30% through Series B.
Understand how dilution affects the trajectory of ownership % of interested parties in a company over time. The gist: as a company raises more money, it is increasingly owned by capital (VC Firms) and decreasingly owned by labor (Founders & Employees).
If a company is doing well (all key metrics are up and to the right), dilution shouldn’t concern for you: Your slice of pie is 1/X smaller, but the company should be able to use the raised capital to increase the the pie’s size more than X times.
If a company is doing poorly, capital has more bargaining power to demand a bigger slice of the pie, diluting you more in the process. As an employee, with equity granted at mid-stage strike prices in mid-stage (<1%) quantities, you have very little to gain from “going down with the ship”, and large opportunity costs
Loom’s fundraising history:
Let’s assume you joined at Seed with 1,000 ISOs, while the company has 100k shares outstanding. Yor strike price was a 20% discount on the 409(a) valuation of $1mm, so each $8/share.
The total amount of capital raised is $200.35mm
Here’s the shares outstanding over time, assuming 20% dilution at each stage1:
So at acquisition, Atlassian paid $975mm for 207.36k shares, or $4,701.97 per share.
Your share ownership started at 1%, and you were diluted down to 0.482%. How much is this worth to you now? To understand more behind this, check out How VC Firms Work.
What about an interesting counterfactual, where you were somehow able to avoid dilution in every round? Because you’re so valuable to the company.
It’s worth keeping in mind that the “bigger” a company gets, the more heavily you get dilluted. But, financially, you’d prefer owning 0.482% of a $975mm company than 1% of a $3mm company.
In other words, if you think your company’s valuation can out-pace your own dilution, you are happy to be diluted. If you think your company is perfectly fine as a “
Although, the second series B was likely closer to 30% than 20% dilutive. Since the company seemed unable to demand a series C.↩︎