# What Is Equity Dilution? Knowing How Much of Your Startup You Have Sold

- URL: https://girisimcikafasi.com/en/blog/what-is-equity-dilution/
- Published: 2026-10-23
- Updated: 2026-10-23
- Category: Finance and business models
- Publisher: Girişimci Kafası

In the autumn of 1867, in a machine shop converted from an old mill in Milwaukee, three men were writing letters with their new invention. The printer Christopher Latham Sholes wanted to show friends and acquaintances the writing machine he had built with his partners Samuel Soule and Carlos Glidden. Hundreds of letters went out. According to George Iles's Leading American Inventors, published in 1912, only one of them hit the mark.

It reached James Densmore in Pennsylvania. Without seeing the machine, he asked to buy a share of the patent. The three partners held a hurried conference and offered him a quarter of it; in return he would pay all their expenses to date. Densmore said yes at once, before he knew what those expenses were. They turned out to be about $600.

When he first saw the machine, he was not impressed. Iles reports that he called it good for nothing except to show that its underlying principles were sound, and offered to advance whatever money was needed to keep improving it. Soule and Glidden soon dropped out. Sholes built about thirty more models, and Densmore paid for each one. With every new bill, Densmore's share grew a little larger.

In 1873, when the machine went to the Remington works, Sholes accepted a lump sum for his interest. Writing in 1912, Iles says tradition puts it at $12,000. Densmore chose a royalty instead, and it earned him $1,500,000. Nobody had taken Sholes's share from him. It had simply melted away, one small and reasonable-looking slice at a time.

## Dilution makes no noise

Most founders today walk a more complicated road than Sholes did. Kirsty Nathoo, Y Combinator's chief financial officer and one of its partners, said in a 2018 Startup School talk that she had seen more than 1,500 companies through incorporation and their funding rounds. In her view, the most common mistake founders make is not knowing, at the time, how much of the company they have sold.

She also warns about a familiar sentence: "My lawyers deal with my cap table." That is a dangerous comfort. A simple spreadsheet showing who owns how many shares is enough at the start. But understanding that spreadsheet is the founder's job.

## What a SAFE is, and what it is not

In the United States, most startups raise their first money on a SAFE: a Simple Agreement for Future Equity. The investor hands over money today, and the company promises to give them shares later, when it raises a priced round.

A SAFE is not debt; it carries no interest and no maturity date. According to Nathoo, there are usually only two things to negotiate: how much the investor puts in and the valuation cap. That is where the trouble starts. Because a SAFE is not yet shares, the cap table does not change. And when the table does not change, the founder assumes nothing has been sold.

## Add up every SAFE on the day you sign it

With the post-money SAFE that YC began recommending in 2018, the sum is a single line: the amount invested divided by the valuation cap. In Nathoo's 2018 example, the first investor puts in $200,000 on a $4,000,000 cap and gets 5% of the company. A few months later, a second investor puts in $800,000 on an $8,000,000 cap and gets 10%.

Not a single line of the cap table has moved, yet the founders have sold 15% of the company. Do this sum on the day each SAFE is signed and keep a running total. Like each of Densmore's cheques, every SAFE looks small on its own.

## Count the option pool too

Once money arrives, the first job is usually hiring, and share options are set aside for employees. In Nathoo's example, once that pool exists the cap table shows the founders holding 92.5%. Their real share, after the SAFEs are taken into account, is about 78.6%.

In a priced round, investors usually ask for the option pool to be topped up to around 10% after the round; Nathoo says anything above 15% is fairly unusual. That top-up comes out of the existing shareholders' stake, not out of the new money.

## What the cap table says at Series A

In the same example, a year later the company raises $5,000,000 at a $15,000,000 pre-money valuation, making the post-money valuation $20,000,000. First the SAFEs convert into shares, then the option pool grows, and only then does the new money come in. According to Nathoo's 2018 talk, when the round closes the founders are left with 51.5%.

For a founder who once saw 92.5% on the table, that is a shock. As Nathoo puts it, there is not much you can do at that point, because most of the dilution has already happened through the SAFEs you signed. Before every round, ask yourself two questions:

- **What have I sold so far?** Add up the percentages of every SAFE and include the option pool.
- **What will be left after this round?** Take off the new investment's percentage and the pool top-up, then divide the result by the number of founders.

In YC's guide to seed fundraising, Geoff Ralston writes that giving up as little as 10% in a seed round is wonderful, that most rounds will require up to 20% dilution, and that you should try to avoid more than 25%.

## Do not fight over the cap

There is a trap in the other direction too: treating the valuation cap as a scorecard. Nathoo ran those numbers as well. Had the second investor's cap in the example been $10,000,000 instead of $8,000,000, the founders would have ended up with 52.7% rather than 51.5%. The effort spent winning that difference from investors who negotiate every day is, more often than not, effort the company needed.

A cap set too high carries its own risk. If the next priced round comes in below it, the SAFEs convert at the lower price and you end up selling more than you expected.

## Dilution and the flood

The English word dilution comes from the Latin verb diluere: dis-, meaning apart or away, and luere, to wash. Its first sense is to wash away or dissolve. The same verb gave Latin diluvium, a flood, and from there English deluge. In Turkish, accountants speak of "sulandırılmış" earnings per share, literally "watered down". Losing your share is rarely a single flood; it is water added drop by drop.

Psychologists have a name for this blindness: denominator neglect. In a study by Veronika Denes-Raj and Seymour Epstein, published in 1994, participants could win a prize by drawing a red jelly bean from one of two bowls. In one, 1 bean in 10 was red; in the other, 9 in 100. The small bowl offered better odds, yet 61% of participants chose the large one. Their eyes were on the number of red beans, not on the total.

Founders look at a cap table the same way. The number of shares they hold stays put; what changes is the denominator. Because their own number never moves, the loss stays out of sight.

## The unseen wearing away

In the first book of De Rerum Natura, the Roman poet Lucretius chooses ordinary examples to describe change that the eye cannot see:

> "anulus in digito subter tenuatur habendo, / stilicidi casus lapidem cavat... / haec igitur minui, cum sint detrita, videmus. / sed quae corpora decedant in tempore quoque, / invida praeclusit speciem natura videndi."

A ring on the finger grows thin with wearing, and dripping water hollows out a stone. We see these things shrink once they are worn; but which particles slip away at each moment, envious nature has hidden from our sight.

Sholes only saw how his share had melted away once it was all over. If you opened your cap table today, could you say in one sentence what percentage of your company is truly yours?

*If you want to get the first split right before any dilution begins, [How Should Co-Founders Split Equity?](https://girisimcikafasi.com/en/blog/how-should-co-founders-split-equity/) is worth a read.*