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> Funding rounds dilute preexisting investors. How / why? I tried Googling this and it's left me more confused. If I purchase 5% of a company, and that company

> Funding rounds dilute preexisting investors. How / why? I tried Googling this and it's left me more confused. If I purchase 5% of a company, and that company later gets other investors, assuming I do nothing, how can I end up with less than 5% of the company? One of the answers[1] I found says, > The company creates new shares to sell when the financing event is imminent. Thus every existing holder gets an equal amount of dilution, and the number of conceivable rounds is infinite. By doing this, how is the company not effectively selling something that isn't theirs? (the portion of the company that I thought I owned, that is now "diluted"?) [1]: http://www.quora.com/How-does-equity-dilution-work-when-a-start-up-goes-through-several-rounds-of-funding-from-seed-to-VC-etc http://www.quora.com/How-does-equity-dilution-work-when-a-st...

IgorPartola 11y ago
My interpretation is that now you own a smaller percentage of a more valuable company and in theory your dollar value stays the same.
- hobbyjogger 11y ago
  Your dollar value should actually increase (assuming we're not talking down rounds). You still have the same amount of shares, but an "up round" means that each share is now theoretically worth more than it was when you bought in. Practically, however, it's hard to put a true "value" on the shares until an actual sale of the Company or IPO.
tptacek 11y ago
The company is not actually selling "five percent of itself". It's selling shares, and the number of shares in the whole company is a board decision. In serious financing rounds, the company sells preferred shares which have shareholders agreements attached that might protect investors against dilution, for instance by allowing those shares to convert into common shares at a rate that accounts for any dilution. In practice, dilution as a simple function of outstanding shares is a fact of life, expected by everyone who invests.
maxerickson 11y ago
It's done with the permission of a majority of shareholders (and any the remaining shareholders had agreed that this is a sufficient condition when they bought shares).

IgorPartola 11y ago

My interpretation is that now you own a smaller percentage of a more valuable company and in theory your dollar value stays the same.

hobbyjogger 11y ago
Your dollar value should actually increase (assuming we're not talking down rounds). You still have the same amount of shares, but an "up round" means that each share is now theoretically worth more than it was when you bought in. Practically, however, it's hard to put a true "value" on the shares until an actual sale of the Company or IPO.

tptacek 11y ago

The company is not actually selling "five percent of itself". It's selling shares, and the number of shares in the whole company is a board decision. In serious financing rounds, the company sells preferred shares which have shareholders agreements attached that might protect investors against dilution, for instance by allowing those shares to convert into common shares at a rate that accounts for any dilution. In practice, dilution as a simple function of outstanding shares is a fact of life, expected by everyone who invests.

maxerickson 11y ago

It's done with the permission of a majority of shareholders (and any the remaining shareholders had agreed that this is a sufficient condition when they bought shares).