Every time you offer equity in exchange for funding, all existing shares in the company experience dilution. When dilution occurs due to new funding, it’s essentially like cutting the pie into more slices. With the new funds, you have a smaller slice — but it’s worth more. For example, say you currently own 50% of your company, and an investor values your business at $1,000,000, and wants to invest $100,000. To calculate the dilution, you first have to find the value of your company after the investment, which is the post-money valuation. In this case it’s $1,100,000. Then you divide their investment by the post money valuation: $100,000/1,100,000 = 9.1% 9.1% is how much equity that investor will get. This is also the percentage that each shareholder’s equity will be diluted. To calculate your new equity find 9.1% of the original share (4.55) and then subtract that from the share: (50 – 4.55) = 45.45% While the investment will probably raise the company’s valuation and enable it to grow, owning less of your company will mean that your ownership decreases each time you take an equity investment, which is common practice. For example, Bill Gates only owns 4% of Microsoft. For some, this isn’t a bad thing. Some business owners leverage insights from angel and venture capitalists who can help steer their business towards success.
Source:
Fundera
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