Equity Dilution Guide 101: A Startup Guide to Equity Dilution

October 18, 2016 Shareworks Marketing

If you’re looking to learn all about equity dilution, you’ve come to the right place. In this guide, you’ll gain a comprehensive understanding of what equity dilution is, how it works, how to calculate it, and what causes it. This guide is designed to help you learn about all the major aspects of equity dilution, from the meaning of equity dilution and how it affects a shareholder’s ownership stake in a startup to waterfall analysis and more. 

The Basics of Equity Dilution

For early stage founders, fundraising decisions are critical when it comes to facilitating growth, however, not all founders truly understand how fundraising affects their companies and shareholders. While many understand the basic concept that, when a fundraising round is completed, a founder’s ownership percentage is decreased, not all understand the long-term implications of equity dilution or how to calculate it over a five-year period, for example.

After reading this guide, you should understand not only how dilution can affect a founder’s ownership percentage, but also how it impacts shareholders over time. Below, we’ll start with defining equity dilution to build a foundation before moving on.

1.     What is equity dilution?

For beginners, this section of the guide helps you understand what the definition of equity dilution is and provides a hypothetical equity dilution example. 

2.   How does equity get diluted?

In this section, we dive deeper into the more advanced topic of how dilution of shares takes place, as well as explore some types of equity dilution.

3.     How to calculate equity dilution.

If you’ve ever wondered how equity dilution is calculated or how to calculate fully diluted shares, this chapter includes an equity dilution formula and a step-by-step explanation of how to utilize Shareworks as your equity dilution calculator.

4.     Sources of equity dilution

In the final section of our Equity Dilution Guide you will learn about the different sources of equity dilution along with a brief overview of industry dilution rate benchmark data. 

How Much of this Guide Should I Read?

If you’re looking for a comprehensive overview of stock dilution, sources of stock dilution, and calculating equity dilution, we recommend reading the entire guide. However, if you already have baseline knowledge about share dilution and are looking for more advanced information, we recommend reading the sections that apply to your needs.

We’ve tried to make the guide simple to follow and easy to read, so go at the pace that works for you. And as always, if you have questions or want to learn more about how you can calculate stock dilution and manage your equity compensation plan with Shareworks, get in touch with us to receive a tour of the platform. 

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