Dilution explained for founders: how much will you give up?

What dilution means

Dilution is the fall in your percentage ownership when the company issues new shares. You still own the same number of shares. The total number of shares has grown, so your slice of the whole is smaller.

It is a normal part of raising money. A smaller share of a larger company can be worth more than all of a small one. The aim is to give up only what the milestone requires.

This is general information, not legal or tax advice.

Track dilution at the founder level and the company level. As a founder you care about your own percentage and the control that comes with it. As a company, you care about whether the round funds enough runway. Both views matter when you decide how much to sell.

The arithmetic

Take the example LegalVision uses. A company is valued at £2 million before investment and the investor puts in £500,000. The post-money valuation is £2.5 million, so the investor owns £500,000 divided by £2.5 million, which is 20%. Every existing shareholder is diluted by 20%, so a founder with 60% before now holds 48%.

The formula is your old percentage multiplied by one minus the percentage sold. Run it for each round you expect to raise, and you can see where you will be at Series A before you start the pre-seed.

Try a three-round model: pre-seed, seed and Series A, with an option pool at each stage. Founders are often surprised that a few modest rounds, each fair on its own, leave a founding team with well under half of the company.

Pre-money and post-money

Pre-money is the value before the new money goes in. Post-money is pre-money plus the investment. A £500,000 investment at £2 million pre-money gives 20%. The same £500,000 at £2 million post-money gives 25%. The word you use changes the share you give up, so check which one the term sheet means.

I'd ask every investor to state their offer as a percentage of the company after the round, and then check the valuation against it. It removes any confusion between the two figures.

The option pool shuffle

Term sheets often require a pool of shares for future hires to be created before the investment. That pool counts in the pre-money, so existing shareholders absorb the dilution, and the investor's percentage is unaffected. A larger pool lowers your effective pre-money valuation.

Ask what hiring plan the pool is based on. If the plan covers a handful of roles over 18 months, the pool can be sized to that. EMI helps here. GOV.UK says an employee can hold EMI options worth up to £250,000 over three years, and you avoid Income Tax and National Insurance if the exercise price was at least market value at grant.

Negotiate the pool size and the valuation together. A smaller pool with a lower valuation can leave you in the same place as a larger pool with a higher one, so compare the effective pre-money after the pool, and use that figure to judge competing offers.

Convertibles and ASAs

Advance subscription agreements and similar instruments dilute you later, when they convert. Sprintlaw notes the typical discount at 15 to 25%, and a valuation cap can set a lower price still. The lower of the cap price and the discounted price is usually what applies.

Founders often forget to count these until the priced round arrives. Add each ASA to the cap table as if it converted at the cap, and see your fully diluted holding. If three ASAs convert alongside a new round, the combined effect can be bigger than any one of them suggested.

Anti-dilution protection

Anti-dilution clauses protect the investor if you later raise at a lower price. LegalVision describes them as a way to stop investors being diluted if the company later raises at a lower valuation. The effect lands on the founders and other shareholders.

Ask which form is proposed. A weighted average clause adjusts the investor's price in proportion to the size of the new round. A full ratchet resets their price to the new lower one, which can be severe. For an early round, I'd resist a full ratchet.

Down rounds are the reason these clauses exist, and a founder with a realistic plan rarely expects to meet one. Even so, ask your lawyer to model a down round with the clause in place. Seeing the numbers shows you what you are agreeing to.

How much do founders typically sell?

I won't quote a rule of thumb, because the published figures I could verify do not give one for UK rounds. A better approach is to work back from your plan. How much do you need, how long will it last, and what will it prove? Then ask what valuation the market will pay at that proof point.

The British Business Bank's Small Business Equity Tracker 2026 shows seed deal numbers fell 27% in 2025, and total deals in smaller businesses fell 17%. With fewer deals, a founder who can show a clear plan is in a better position to hold on to more of the company.

Tax relief and the size of your round

Investors who use SEIS or EIS get relief that changes how much risk they carry. The tax relief page on GOV.UK gives SEIS at 50% income tax relief on up to £200,000 a year and EIS at 30% on up to £1 million a year, with the EIS limit at £2 million if at least £1 million goes into knowledge-intensive companies. Investors must hold for at least three years to claim the full reliefs.

That relief makes some investors willing to accept a smaller slice or a higher valuation. The arithmetic of dilution stays the same, and the conversation with the investor can change. Check that the share issue meets the rules, and consider HMRC advance assurance before you accept money.

Questions I'd ask before I sell shares

What does this money buy, and by when? What is my fully diluted percentage after this round and after the next one? Who else will convert or exercise before the next round? What protections does the investor want, and how do they interact with dilution?

Founders who ask these questions early tend to raise less than they first planned, and choose better-matched investors. That is part of the reason we built InvestorUniverse: it ranks UK investors by fit with reasons for each, so you spend your equity on people who will help.

Write the answers down and share them with your co-founders. Dilution affects each of you differently if your holdings differ, and agreeing a common position before a term sheet arrives avoids arguments under time pressure.