For early-stage founders, few things feel more emotional—and confusing—than watching your ownership shrink with each funding round. But dilution isn’t the enemy. In fact, if your startup’s valuation grows, your shrinking slice of the pie can still end up being far more valuable.
Let’s walk through how this is supposed to work—using a hypothetical but realistic cap table example that spans from founding to IPO.
Starting Point: 100% Founder Ownership
At the very beginning, the founders own 100% of the company—that’s 100,000 shares, worth $1 million pre-money.
No outside capital has been raised yet, and there’s no option pool for employees. It’s simple and clean.
Seed Round: Welcome Investors (and an Option Pool)
In the seed round:
Investor 1 puts in $1M at a $1M pre-money valuation (for 50% post).
An option pool is created for future hires—20% of the cap table.
The founders’ share shrinks to 30%, but their company is now worth $2M.
Even though their ownership went from 100% to 30%, their equity value grew from $1M (on paper) to $600K in real value.
✅ Dilution: Yes
✅ More value: Also yes
Series A: Growth and More Dilution
In Round 2 (Series A):
Pre-money valuation grows to $5M
A new investor joins with $5M at a post-money valuation of $10M
Another 12.5% option pool is added
Founders go from 30% down to 11.25%, but here’s the key:
Their equity is now worth $1.125 million—almost double what it was in the previous round.
Series B: The Big Jump
By Round 3:
The company is valued at $20M pre-money
It raises $10M
A small option refresh is added (~2%)
Now, the founders’ stake falls to 7.27%—but it’s worth $2.18 million
This is the moment where founders start to realize:
"Owning less of something big is better than owning all of something small."
IPO: The Exit
By the time of IPO:
The company is worth $150M pre-money and raises $37.5M
An additional 20% is issued to the public (IPO shares)
The founders’ final share is 5.81%, but guess what?
Their stake is now worth $10.9 million.
Key Takeaways
Here’s what this chart is really saying:
Dilution is not a disaster—if your valuation grows faster than your ownership shrinks, you win.
Option pools matter. They take up space on the cap table, and they’re usually created before a round closes (so founders absorb the dilution, not new investors).
Every round should increase value, not just raise money. If your valuation doesn't grow meaningfully between rounds, you’re just giving away equity.
Think in dollars, not just percentages. Ownership percentage matters, but equity value is what you take home.
Final Thought
If you're a founder stressed about dilution, remember: It’s a trade, not a loss.
You're giving up percentage ownership in exchange for capital, credibility, and growth. The goal is to make your company so valuable that your smaller slice is worth more than the whole pie ever could’ve been.
This is the way it’s supposed to work.
Here is a link to a startup equity calculator.
This post is based on Frank Demmler’s Equity Compensation