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The Mechanics of Startup Equity Dilution
For startup founders, raising venture capital is a key milestone for growth, but it comes at the cost of equity dilution. Equity dilution occurs when a company issues new shares to investors, which reduces the ownership percentage of existing shareholders.
Although your individual ownership percentage drops, raising capital should increase the total valuation of the company. The goal of venture funding is to own a smaller percentage of a much larger, more valuable business.
To model dilution, you must establish the pre-money valuation (what the company is worth before funding) and the investment amount. Adding these yields the post-money valuation. Investor ownership is then calculated as the investment divided by the post-money valuation.