How does equity dilution work when a start-up goes through several rounds of funding (from seed to VC etc)?

The first thing I would say is that dilution is not always a negative. What you want to focus on is the valuation.

When you start your company, you might own 100% of a small entity with little to no value. As you grow your company through several rounds of funding – seed, Series A, Series B, etc. – you’ll own a smaller percentage, but your smaller percentage will be worth more than a larger stake because it’ll be part of a much larger pie.

In other words, 100% of nothing doesn’t have much value, but 50% of a $1 million pie starts to become more meaningful. As you continue enlarging the size of your pie with each new round of funding, your equity stake will be reduced, but the value of your holdings should be significantly higher. So, thinking about “value” as opposed to “percentage” is probably a better way for you to think about this question.

I talk more about how dilution works here and here.

This chart provides some general guidelines: 

The following graph will also give you a pretty good idea about the inverse relationship between valuation and equity ownership. Basically, as your company’s value increases, your percentage of ownership decreases. This is the tradeoff: you sell shares (ownership) to investors in exchange for the money they inject into the company to help you grow it. 

If you need further help understanding equity dilution, check out LawTrades to book a free call with an experienced startup lawyer. Hope that makes more sense.

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