If you are investing in startups or building a company that plans to raise money, you will hear the term dilution constantly. It is one of the most important ideas in private investing and equity ownership, because it tells you how much of the company you truly control and what your stake might be worth in the future.

This guide explains what dilution is, how it happens, and why it is not always a bad thing.

What is dilution?

Dilution happens when a company issues new shares. This increases the total number of shares outstanding. Because your ownership is based on your shares divided by the total shares, issuing new shares means your percentage ownership goes down.

In simple terms:

• You still own the same number of shares.
• But those shares represent a smaller slice of the overall company.

A simple example of dilution

Imagine you invest early in a company and own 1,000 shares out of 10,000 total shares outstanding. That means you own 10 percent of the company.

Later, the company raises more money and issues 5,000 new shares to new investors. Now the total shares outstanding is 15,000. You still own your original 1,000 shares, but your ownership is now:

1,000 shares ÷ 15,000 shares = 6.7 percent ownership

This is dilution. Your percentage has dropped from 10 percent to 6.7 percent.

Why do companies dilute shareholders?

Most startups dilute ownership to raise money. They sell new shares to bring in capital that can be used to build products, hire teams, expand into new markets, or acquire other businesses.

Companies can also dilute ownership by:

• Creating or expanding an option pool for employees. This sets aside shares to reward current or future staff, increasing total shares outstanding.
• Converting SAFEs or convertible notes. These are early funding tools that later turn into equity. When they convert, they add more shares to the cap table.

Why dilution is not always bad

At first, dilution looks negative. You own less of the company than before. But ownership is only half the equation. The other half is the value of the company itself.

If the new capital raised through dilution allows the company to grow dramatically, your smaller percentage could still be worth much more.

Example of dilution paired with growth

• Before: You own 10 percent of a $2 million company, so your stake is worth $200,000 on paper.
• After: The company raises money, issues new shares, and you are diluted to 6.7 percent, but the company now grows to $10 million. Your stake is worth $670,000, more than triple your original value.

This is why most investors and founders accept dilution. The pie gets bigger even if your slice is smaller.

When dilution can be harmful

Dilution becomes a problem if the company issues new shares repeatedly without driving meaningful growth in value. In that case:

• Your percentage drops.
• The company’s overall value does not grow fast enough to offset it.
• Your stake becomes worth less.

For founders and early employees, too many rounds of poorly structured fundraising can leave them with small percentages that do not justify years of work.

Tools investors use to manage dilution

Because dilution can dramatically change outcomes, experienced investors negotiate protections, including:

• Anti-dilution provisions: Adjust how many shares investors get if the company raises at a lower valuation later. This prevents heavy dilution from down rounds.
• Pre-emptive rights: Give investors the ability to buy more shares in future rounds so they can maintain their ownership percentage.

Founders and early employees also watch the option pool closely, since increasing it dilutes all existing shareholders.

How to spot dilution on a cap table

A cap table is the document that shows who owns what. To understand your true stake:

• Look at the fully diluted ownership percentage. This assumes all options, convertible notes, and warrants convert to shares.
• Check how much of the company is allocated to option pools and what is still unissued.
• Review any notes that describe outstanding convertible securities that might turn into more shares.

The bottom line

Dilution is a normal part of growing a business. It happens whenever new shares are issued, whether to raise money from investors or to reward employees. Understanding what dilution is ensures you look beyond just the number of shares you own. You can then see the full picture: how much of the company you truly control, how your percentage might change over time, and whether the business is growing enough to make it worthwhile.

Knowing how dilution works is essential if you want to invest smartly, negotiate better, and build companies that create meaningful value — even if your slice of the pie gets smaller.