Equity dilution is a critical financial metric for company owners, investors, early employees. The concept is simple: whenever a company raises funding, existing shareholders’ ownership percentages are reduced to make space for new investors.
In this article, we will cover:
- What Is Equity Dilution?
- What Is the Equity Dilution Calculator?
- How to Use the Equity Dilution Calculator
- How Equity Dilution Is Calculated — Formula
- A Real-World Example
What Is Equity Dilution?
Equity dilution refers to the concept that when a company issues new shares (e.g. during funding), existing shareholder ownership is reduced to make space for new investors. Here are some key points:
- Before investment, the existing ownership adds up to 100%.
- After investment, the company issues new shares to the investor, reducing the ownership percentage of the existing shareholders. The sum of the new investor's ownership and the existing owners' ownership is 100%.
- Most importantly, remember: ownership dilution does not mean a loss of value. It simply means that ownership is divided among all investors based on their investment.
What Is the Equity Dilution Calculator?
Our Equity Dilution Calculator automates these calculations and helps you answer the following questions:
- What’s my post‑money valuation?
- How much equity will the investor own?
- What will my ownership percentage be?
- By how many percentage points will I be diluted?
How to Use the Equity Dilution Calculator
The calculator is designed to make the calculation process simple. Just fill in three key inputs:
- Your Current Ownership (%): Enter your current ownership as a percentage, (e.g. you own
25%). - Pre-Money Valuation: Enter the company’s total valuation before the new investment (e.g. company total existing valuation is
$3,000,000). - New Investment Amount: Enter the total funding being invested (e.g. a new investor invested
$200,000).
Once you fill in all key inputs, the calculator automatically performs the calculation and displays these results.
Here’s the result based on the example values:
- Post-Money Valuation:
$3,200,000 - Investor's New Stake:
6.25% - Your New Ownership:
23.44% - Diluted by
1.56%
How the Equity Dilution is Calculated — Formula
The logic behind the calculator is very simple. The following formulas are used to calculate equity dilution:
- Post‑money valuation: Add new investment amount to pre-money valuation.
postMoney = preMoney + investment
- Investor’s percentage: Divide investment by post‑money valuation, then multiply by 100.
investorPct = (investment / postMoney) * 100
- Your new ownership: Multiply current ownership by the ratio of pre‑money to post‑money valuation:
newOwnership = currentOwn * (preMoney / postMoney)
- Dilution percentage: Subtract new ownership from current ownership.
dilutionPct = currentOwn - newOwnership
Now let’s look at an example to see these formulas in action.
A Real‑World Example
Imagine you own 20% of your startup, and its pre‑money valuation is $50 million. An investor wants to invest $10 million:
- Your Current Ownership:
20% - Pre-Money Valuation:
$50 million - New Investment Amount:
$10 million
Let's perform calculation:
- Post‑Money Valuation:
$50 M + $10 M = $60 million. - Investor’s Stake:
($10 M ÷ $60 M) × 100 = 16.67%. - Your New Ownership:
20% × ($50 M ÷ $60 M) = 16.67%. - Dilution:
20% − 16.67% = 3.33 percentage points.
After the funding round, both you and the investor each hold a 16.67% stake, and you’re diluted by 3.33 percentage points. The company is now worth $60 million.
