Dilution

Dilution is the reduction in an existing owner’s percentage stake when new shares are issued, whether to new investors, option pools or employees. It runs through the valuation material in the wiki:

• Funding rounds. How Startup Valuation Works — Illustrated gives angel-round examples (incubator ~5 percent dilution up to micro-VC ~20 percent) and an investor whose 20 percent seed stake is diluted to about 4 percent by later rounds. It also shows how a pool counted in the pre-money lowers the true valuation.
• Stock compensation. Thoughts on Stock Comp in SaaS argues stock-based compensation is best accounted for as dilution and shows how the cost climbs as multiples fall: at 3x ARR a policy that was tolerable at 15x means issuing about 7 percent of the company a year. A saved “2023 tech reality check” list makes the same point: “dilution isn’t free.”
• Fund math. A thread argues VCs now want larger ownership stakes at IPO because exit sizes are smaller: with a $250m fund, 15 percent of a $1B IPO ($150m) does not return the fund, whereas 5 percent of a $10B–$20B decacorn exit could.
• Founders’ view. A VC exit model thread says its model helps founders see the impact of dilution on current and future investors.
• Valuation practice. Valuing Young, Start-up and Growth Companies notes anti-dilution protections and pre- and post-money math.

Where this appears

Long reads

• How Startup Valuation Works — Illustrated
• Thoughts on Stock Comp in SaaS
• Valuing Young, Start-up and Growth Companies

Tweets

• VCs Are Also Going to… (tweet)
• 2023 Tech Reality Check… (tweet)
• VC Exit Model🪄 I Truly… (tweet)