What is dilution?

If you own 50 shares out of 100 total, you own 50% of a company.

If a company is fundraising and agrees to sell another 100 shares to an investor, you now own 50 shares out of 200 total, which is 25%.

That is dilution. In the above example you were diluted by 25%.

Why should I care?

Two reasons: money and control.

Money

If you own less of a company, you will make less on an exit. 50% of a billion dollars is twice as much as 25% of a billion dollars. Dilution often cannot be avoided because company's need to raise money and sell equity to investors, but it's important to be mindful of dilution as you continue through funding rounds.

Control

Likewise, owning shares in a company gives you a right to vote on fundamental transactions and to elect a board of directors.

If you own 50% of a company, you have a high amount of control in appointing directors and being the final say on a potential exit.

If you own 25% of a company, you can more easily get out-voted by your investors.

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