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?