How much dilution should I expect when negotiating with a VC/PE firm or angel investor?

Dilution is a function of your company’s value and how much you plan to raise. For example, let’s assume that your company is worth $9 million. In other words, the total value of the equity shares that have been issued equals $9 million; this is called the “pre-money valuation”, since it’s what the firm is worth before receiving investment. If you now want to raise $1 million, then you clearly cannot continue to own 100% of the shares, so your percentage ownership will necessarily go down (or “get diluted”). After receiving an infusion of $1 million, your firm would now be worth more than before, since it now has $1 million of extra cash — in fact it would be worth $10 million ($9 million + $1 million). This is known as the post-money valuation. If you originally owned all of the shares, then you will go from owning 100% to owning 90% of the equity shares. You have been diluted by 10% (100%-90%). As you can see from this example, dilution equals the funds invested divided by the valuation of the firm after receiving the investment (”post-money valuation”, which in this case is $9 million + $1 million = $10 milion).

There is no hard and fast rule regarding how much dilution to expect from an early stage investor, but it can range from a few percentage points up to close to 50%. A VC may want a board seat, so it’s not in your interest to give up a board seat for a very small amount of investment. On the other hand, an angel investor may be happy to make a very small investment with no expectation of a board seat, in which case the dilution would be minimal. If you are looking for a large investment, you may get diluted significantly, but a smart VC investor would not want to remove your incentive to make the company a success. So if the dilution is very high, say around 50%, the VC firms may actually lose interest because they feel there’s not enough incentive left for you.

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