# Share dilution Author: The Carta Team | Read time: 9 minutes Published date: 11 July 2025 Share dilution is the reduction in an existing shareholder’s ownership percentage after a fundraising round. Learn how to prepare your startup for dilution. Fundraising is exciting—it means investors believe in your ideas and your product roadmap enough to give you money to grow. But fundraising decisions come with long-term implications, including share dilution, that are critical to consider before accepting any new funds. Share dilution can change both your financial stake in a company and how much control you have over the company’s operations. In this article, we’ll show you how to plan for share dilution when fundraising for your startup using two common methods of early-stage fundraising: SAFEs and priced rounds. ## What is share dilution? Share dilution occurs when a company issues new shares of stock, which reduces the ownership percentage for existing shareholders. Also known as stock dilution or equity dilution, share dilution can happen due to raising capital during a new fundraising round, changes to an employee stock option pool, conversion of convertible securities, a merger or acquisition, an initial public offering (IPO), and other material events. Essentially, when a private company increases the number of outstanding shares, its founders, employees, and investors are generally all subject to share dilution. ### Causes of share dilution Common causes of share dilution include: - **Fundraising rounds**: When private companies need more money, they typically issue new shares to investors in a funding round, which reduces the overall percentage of ownership for current shareholders. - **Employee option pools**: Incoming investors usually require companies to create a stock option pool. The timing of when the stock option pool gets created determines which shares are diluted. - **Convertible securities**: Convertible instruments such as SAFEs (Simple Agreement for Future Equity) and convertible notes allow investors to provide funding for the right to convert their investment into shares at a future date, typically at a discount or pre-set valuation, which can lead to dilution. - **Going public**: An IPO is when a private company lists its shares on a public stock exchange for the first time. Every IPO involves the listing of a company’s existing shares. ### Effects of share dilution Changes in share dilution can lead to changes in ownership percentage, earnings per share (EPS), voting power, and share price. When a company initially issues stock, each share represents a fixed percentage of ownership. However, with issuance of additional shares, each existing share represents a smaller fraction of the company’s total equity. While share dilution often has a negative connotation, it is often necessary for the long-term growth of the company. Understanding the causes of share dilution can help startups model the impact of dilution and minimize the impact on founders, investors, and employees. ### Share dilution example **Single founder**: Let’s say you own 10,000 shares or 100% of the company. If you create an employee option pool of 1,000 shares, and give an investor 2,000 shares for their investment, you now own only 77% of your company. **Multiple founders**: If you’re one of two co-founders of a startup, each owning 50%, and you issue 2,000 shares in return for an investment, your ownership stake becomes 42% instead of 50%. ## SAFEs and share dilution A SAFE (Simple Agreement for Future Equity) allows you to raise money from investors in exchange for future shares of stock in your company. SAFEs can be a convenient way to raise money when your company is young, however they can also be dilutive. ### How does equity dilution work when raising a SAFE? SAFEs postpone equity dilution until your next qualified financing, where SAFE holders get shares in the future, typically at a discount. ### What type of SAFE are you issuing? The type of SAFE you raise (pre-money vs. post-money SAFEs) can impact your eventual equity dilution. Pre-money SAFEs may be less dilutive for you as the founder, because everyone’s ownership gets diluted at the same time. ### What is your valuation cap? Many SAFEs have a valuation cap to protect the investor, which is the maximum company valuation at which an investor’s money will convert into shares. ### Is there a conversion discount? A conversion discount gives your investor a discount on the price per share when their SAFE converts into equity. The median conversion discount among Carta customers who offer one is 20%. ## Priced rounds and share dilution The process of raising a priced round is usually longer and more complicated, but equity dilution is easier to calculate. In a priced round, investors give you a certain amount of money for a set number of shares based on the company valuation you agree upon. ### Pre-money vs. post-money valuation Whether you’ve raised money based on your pre-money or post-money valuation can impact how much the new investment dilutes your ownership. A difference in ownership percentage may seem small, but can be significant in monetary terms. ### Convertible instruments issued before your round If you raised money via SAFEs or other types of convertible instruments, these will convert into equity during your priced round. ### Your option pool Creating an employee option pool can dilute your ownership. Investors often ask you to create an option pool before issuing their shares. ## Dilution vs. capital needs Founders must balance the amount they raise now versus future rounds, considering future dilution. | **Stage** | **Dilution** | | --- | --- | | Seed | 10% - 25% | | Series A | 20% - 30% | | Series B | 15% - 30% | | Series C and later | Highly dependent* | *Generally, if a company is established and has a high valuation, the equity given up tends to be a smaller percentage. ## How to minimize share dilution Some strategies to minimize dilution include: ### Don’t raise more than you truly need Evaluate your capital requirements carefully to avoid unnecessary dilution. ### Don’t create a bigger option pool than you need Creating an accurate hiring plan can help you negotiate a reasonable option pool size. ### Don’t rush Understand the terms of any funding arrangements before committing. ### Model your future equity dilution Model the impact of dilution during fundraising as part of your planning process.