Question 1

What is equity dilution?

Accepted Answer

Your **percentage** of a company falling because new shares were issued — not because anyone took shares from you. Understanding that distinction is the whole subject.

**How it happens.** A company issues new shares to an investor, an employee scheme or a new founder. The total number of shares rises. Your holding is unchanged in number but is now a **smaller share of a larger total**.

Own 1,000 of 10,000 shares and you hold 10%. The company issues 2,500 new shares to an investor; there are now 12,500, and your 1,000 is **8%**.

**Why it is not necessarily bad.** The investor paid for those shares, so the company now has cash it did not have. **A smaller slice of a larger pie can be worth more** — this is the standard justification and it is frequently correct. The question is never "was I diluted" but **"did the value added exceed the percentage given up"**.

**Where it comes from, typically:**

**Funding rounds**, the main source, at each stage.

**Option pools** for employees. Note that these are usually created **before** an investment and come out of the existing shareholders — the **pre-money option pool**, which is a genuine negotiating point that founders frequently miss.

**Convertible instruments** converting into shares later, sometimes at a discount, diluting more than the headline suggests.

**Anti-dilution provisions** issuing extra shares to earlier investors if a later round is priced lower — a **down round** — which concentrates the pain on founders and employees.

**What dilutes control separately from ownership:** board seats, and **reserved matters** or veto rights requiring investor consent for specified decisions. It is entirely possible to retain a majority of shares and lose practical control.

**What to actually watch:**

**Model the fully diluted position**, including options and anything convertible, not just issued shares.

**Work out what you would hold after several plausible rounds.** Founders are routinely surprised by the cumulative effect.

**Pre-emption rights** let existing shareholders participate in new issues to maintain their percentage — worth having, and worth knowing whether you can afford to exercise them.

General information, not legal or financial advice.

Question 2

What is a liquidation preference?

Accepted Answer

The right of certain shareholders — almost always investors — to be paid first when a company is sold or wound up, before ordinary shareholders receive anything. It is frequently the single most

Question 3

What is a cap table?

Accepted Answer

A capitalisation table records who owns what proportion of a company — every shareholder, every class of share, every option and everything that could become a share. What it contains: Every

Question 4

What is vesting, and what is a cliff?

Accepted Answer

Vesting means equity is earned over time rather than owned outright from day one. A cliff is an initial period during which nothing vests at all. The standard arrangement. Four-year vesting with a

Question 5

What happens when co-founders fall out?

Accepted Answer

Usually a slow deterioration rather than a single argument — and what determines the outcome is almost entirely what was agreed at the start, when everyone got on and nobody wanted to raise it. Why

Question 6

What actually matters in a term sheet?

Accepted Answer

Far less than the valuation, and far more than founders expect. A term sheet is mostly non-binding, but it sets the terms everything else follows from, and the economic and control clauses matter

Question 7

What is the difference between pre-money and post-money valuation?

Accepted Answer

Pre-money is what the company is agreed to be worth before the investment; post-money is pre-money plus the money invested. The difference determines what percentage the investor gets, and confusing

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