Glossary - Dilution
Dilution refers to the reduction in the ownership percentage of a share of stock caused by the issuance of new shares. In the context of venture capital, dilution occurs when a company issues new shares to raise capital or to bring in new investors, which reduces the ownership percentage of existing shareholders.
Also known as
- Equity Dilution
Use cases examples
- Series A Financing Agreement: Upon the closing of the Series A financing, the existing shareholders' equity will be diluted to accommodate the issuance of new shares to the Series A investors.
- Employee Stock Option Plan (ESOP): The allocation of new stock options to employees under the ESOP will result in dilution of the existing shareholders' equity.
Considerations for investors
- Investors should consider the potential for future dilution when evaluating the valuation and terms of an investment.
- Including anti-dilution provisions in investment agreements can provide some protection against dilution from subsequent financing rounds.
Considerations for founders
- Founders should be aware of dilution's impact on their ownership percentage and control over the company.
- Negotiating anti-dilution rights can help protect founders from significant erosion of their ownership stake in future funding rounds.
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