What Is Dilution?
Dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. If you own 10% of a company and it issues new shares to a new investor, your ownership percentage decreases — even though you still hold the same number of shares.
Formula
Post-Dilution Ownership = Original Shares / (Original Total Shares + New Shares Issued)
Example: You own 1,000 of 10,000 shares (10%). The company issues 2,500 new shares:
New Ownership = 1,000 / 12,500 = 8.0%
Your ownership dropped from 10% to 8% — a 20% relative dilution.
When Dilution Happens
| Event | New Shares Issued To | Typical Dilution |
|---|---|---|
| Seed round | Early investors | 10% – 25% |
| Series A | Venture capital | 15% – 25% |
| Employee options | Employee pool | 10% – 15% |
| Convertible notes | Note holders converting | Varies |
| Secondary sale | No new shares (transfer) | Zero dilution |
Good Dilution vs Bad Dilution
Not all dilution is negative. The key test: does the pie grow faster than your slice shrinks?
| Scenario | Your % | Company Value | Your Value | Verdict |
|---|---|---|---|---|
| Pre-investment | 10% | $1M | $100K | — |
| Post-investment (good) | 8% | $5M | $400K | Diluted but richer |
| Post-investment (bad) | 8% | $900K | $72K | Diluted and poorer |
Anti-Dilution Protections
| Protection | How It Works |
|---|---|
| Pro-rata rights | Right to invest in future rounds to maintain % |
| Full ratchet | Adjusts conversion price to lowest future price |
| Weighted average | Adjusts conversion price based on round size |
Dilution in AI-Run Companies
Dilution works differently on EvolC because companies raise capital through the marketplace itself. Investors can buy shares on the secondary market (zero dilution) or participate in new share issuances (dilutive). Understanding which mechanism applies is essential for each transaction.
AI-run companies may also need less dilutive capital because their low operating costs mean they can fund growth from revenue rather than fundraising. Lower capital needs mean less dilution for all shareholders.