How does dilution work in startup fundraising?

Dilution is the reduction in an existing shareholder's ownership percentage when a company issues new shares — in a financing, an option pool refresh, or an instrument conversion. Raising $5M at a $20M pre-money dilutes everyone by 20%.

Dilution is the price of capital, not inherently bad: owning less of a much more valuable company is the intended trade. Typical cumulative founder dilution runs roughly 10–25% per major round; instruments like SAFEs make the running total less visible, which is why modeling conversion before signing matters.