Understanding Share Dilution
When a company issues new shares โ through a secondary offering, stock options, or convertible notes โ the total share count increases, reducing existing shareholders' percentage ownership. This is called dilution. A shareholder with 10% ownership before a 25% share increase will hold only 8% afterward โ a dilution of 20% of their stake.
Formula: After Dilution % = Your Shares รท (Total + New Shares) ร 100, Dilution Rate = (Before% โ After%) รท Before% ร 100. Use this calculator when evaluating startup funding rounds, rights offerings, or employee equity plans to understand the impact on your ownership stake.
Frequently Asked Questions
Anti-dilution clauses in investment agreements adjust conversion ratios to protect investors when new shares are issued at a lower price (down round). Common forms are full ratchet and weighted-average anti-dilution.
Options don't dilute until exercised. However, a company's fully diluted share count โ used for valuation โ includes all outstanding options, warrants, and convertible securities, regardless of vesting status.