Plan for Equity Dilution Over Multiple Rounds

One of the areas I like to help entrepreneurs understand is how equity dilution works with each round of financing. A general rule of thumb is 30–40% dilution with each round (e.g. 30% for investors and 10% for a new employee option pool) such that founders usually have between 4 and 15% at time of IPO (see Founder Equity of Ownership at Time of IPO).

For simple math, let’s say an entrepreneur has 100% of the business. Here’s how the dilution might work, assuming 35% dilution in each round:

  • After round 1–65%
  • After round 2–42%
  • After round 3–28%

So, after three rounds of financing, an entrepreneur would have 72% less equity (28% of the original equity).

Entrepreneurs would do well to understand how dilution works and to plan accordingly.

What else? What are some more thoughts on equity dilution over multiple rounds?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s