Equity Dilution Calculator

There’s a point in every entrepreneur’s journey at which startup math cease to be abstract, and begins to feel very personal, typically just prior to signing your seed round term sheet. After months of iteration, building out a product and hiring staff based on a vision, you’ve come to terms with the fact that taking money will shrink your slice of pie. Raising isn’t a penalty for success. It’s the price you pay for gaining velocity. The trick is knowing precisely how much velocity is worth purchasing.

When most founders go into this conversation they kind of have a ballpark estimate for how many shares they own, but it’s never exact because they don’t understand what fully diluted share count is. The difference between the fully diluted share count and the actual share count is where everyone gets screw up. Fully diluted means all the reserved shares in the option pool plus all the warrants plus all the options outstanding plus all the common stock currently issued. So if you’re just looking at common stock issued, you will be over-estimating your ownership. Most people leave out that piece, they believe they own 40% of the company, but when we account for the options and warrants, it turns out they actualy own 35%.

Understanding Startup Ownership Math

Enter the calculator. After you enter your share count before financing, the calculator crunches the numbers so you don’t show your investors an incorrect cap table. That’s where things get complex. You must also consider the possibility of expanding the option pool. Nearly every VC will ask for expanded pool so they have more shares to issue to new employees once funding closes. How do you allocate this dilution? If you expand the pool with pre-money shares, then you absorbs the dilution as an owner. If you expand the pool using post-money shares, however, then the VC eats a portion of this cost. Using the tool, you’re able to specify the desired size of the new pool and solve for how many new shares it requires.

Why does it matter? A 10% increase in the pool could cut a few points of ownership that seem baked-in but don’t actualy represent any issued shares yet. This is a choice: you’re giving up today’s ownership in exchange for increased ability to hire in the future. It’s a strategic trade-off, more different than a loss.

There’s also one other wrinkle in the frictional equation: convertible notes and SAFEs. They are structured to convert into equity using either a valuation cap or a discount. In other words, whoever owns them gets more shares if it converts on the cap then what you’d recieve from simply doing a price-per-share calculation. That means even more dilution for everybody except those who converted early. To know how much you own post-money, you’ve got to model the conversion correctly. If you don’t take into account the convertible principal when you’re modeling your ownership, then you’re staring at a fake valuation. The table on the page spells this all out clearly, how changing terms for converting changes the number of shares.

It is important to understand the difference between relative dilution and point loss. An eight-point drop from 40% to 32% represents a twenty percent relative dilution. This is the metric that matters for your economics. You will still be in a better position if your relative piece shrinks by 20% and your valuation doubles. This is where you can balance out the numbers against the growth using the calculator, it shows both metrics.

The numbers don’t have to be scary. Remember, equity is just a means to an end (not an end unto itself). A bigger piece of a stagnant company is far worse than a smaller piece of a booming one. Test your comfort levels. Run some scenarios. Get familiar with how the deal works. And then tuck it away and get back to building. Math is simply the floor plan. You’re responsible for building the house you should of planned.