Equity Dilution
What is Equity Dilution?
Equity dilution occurs when a company issues new shares, thereby reducing the ownership percentage of existing shareholders. While new investments can bring much-needed capital to the company, they also result in a smaller share of the company for each existing shareholder. Startups must balance the benefits of raising capital with the impact of diluting equity.
Managing Equity Dilution
- Timing of Funding Rounds: Strategically planning when to raise funds to minimize dilution.
- Negotiating Investment Terms: Setting terms that limit dilution, such as higher valuations or smaller equity stakes for investors.
- Employee Equity Compensation: Offering stock options with vesting schedules to manage equity allocation.