Insights, Business Advisory, Company Set-up and Regulatory Compliance

Equity Dilution: What Founders and Early Investors Need to Know

Equity Dilution: What Founders and Early Investors Need to Know

As startups grow and seek funding, understanding equity dilution is crucial for both founders and early investors. But what exactly is equity dilution, and why does it matter?

What is Equity Dilution?

Equity dilution happens when a company issues new shares, reducing the ownership percentage of existing shareholders. This often occurs during funding rounds or capital raises to secure capital for growth, product development, or expansion. While essential for growth, equity dilution significantly impacts founders and early investors.

Implications for Founders and Early Investors

For most tech startups, equity dilution is inevitable. Ideally, dilution should coincide with a higher company valuation so that the actual value of the investment remains the same or increases. To better appreciate this, let us consider the dilution impact of a subsequent fundraising at a higher and lower valuation in a scenario where a startup is initially valued at $100,000 with 100,000 units of shares and investor A holds 10% of the startup ($10,000/ 10,000 units of shares).

Description Higher Valuation Scenario Lower Valuation Scenario
Pre-money valuation $150,000 $90,000
Additional fund raised $50,000 $50,000
Price per share $1.5    $150,000

100,000

$0.9   $90,000

100,000

Number of shares issued to new investors 33,333 units  $50,000

$1.5

55,556 units   $50,000

$0.9

Total issued shares post-money 133,333 units (100,000 + 33,333) 155,556 units (100,000 + 55,556)
Post-money valuation $200,000 ($150,000 +$50,000) $140,000 ($90,000 +$50,000)
Investor A’s stake post-money (%) 7.5%      10,000   X 100

133,333

6.4%      10,000  X100

155,556

Value of Investor A’s stake post-money $15,000 (10,000 X 1.5) $9,000 (10,000 X0.9)

 

To read the full article, kindly download the PDF

Ifeoma Ezeribe

Partner

Tolulope Oguntade

Senior Associate

Practice Key Contacts

More To Read

19/06/2025
The Written Words that Cannot Testify: Legal Limits to Extra-Judicial Statements of a Witness

Introduction In the heart of Nigeria’s criminal justice system lies a troubling paradox that continues to undermine the integrity of police investigations and the prosecution

11/06/2025
Who is the Real Employer? – Navigating Liabilities in Triangular Employment in Nigeria

1.0 Introduction An employment relationship is founded upon a contract between the person or body (called the employer) who seeks to retain the services of