Financial Planning
How to Model Equity Dilution in a Priced Funding Round
Calculate share price, new shares and post-round ownership with a complete before-and-after table and clear modeling boundaries.
What you will learn
- Calculate issue price and post-round ownership
- Distinguish percentage points from relative dilution
- Identify when a financing needs more complex modeling
Model equity dilution in a priced round by calculating price per share, new shares issued, and each holder’s percentage of the post-financing total. Agree on the capitalization denominator first. A headline valuation alone does not describe ownership after convertibles, pool increases, or other transaction changes.
The example uses one common class, one primary investment, no convertibles, and no pool change. It teaches a share bridge, not which terms to accept. Reconcile current records and have qualified counsel and the finance owner review the actual financing model.
Define the included capitalization
List shares, outstanding options, ungranted reserves, warrants, and convertibles, then identify which enter this scenario’s denominator. “Fully diluted” is not a complete definition unless included items are specified. Carta’s pro forma cap-table guide describes forward financing models. Keep a proposed model separate from the current legal record.
The cap-table checklist owns record administration. This exercise assumes those records are reconciled and calculates one new issuance into the company, not a founder’s secondary share sale.
Calculate a share bridge
- Add the agreed pre-financing shares.
- Divide negotiated pre-money valuation by those shares to calculate the simple issue price.
- Divide new investment by that price to calculate new shares.
- Add new shares to the denominator. Do not subtract existing shares merely because their percentage falls.
- Divide every holder’s post-round shares by the same total.
- Reconcile cash, share counts, percentages and rounding.
Show both shares and percentages. The share count explains what changed; the percentage describes each holder’s fraction of the new whole.
Work the complete example
Illustrative teaching inputs: Founder A holds 4,800,000 shares and Founder B 3,200,000. A new investor puts $2 million into a round at $8 million pre-money. No other securities or changes are included.
Price = $8,000,000 ÷ 8,000,000 shares = $1/share
New shares = $2,000,000 ÷ $1 = 2,000,000
Post-round shares = 10,000,000
Simplified post-money valuation = $10,000,000Completed ownership bridge
| Holder | Shares before | Before | Shares after | After |
|---|---|---|---|---|
| Founder A | 4,800,000 | 60% | 4,800,000 | 48% |
| Founder B | 3,200,000 | 40% | 3,200,000 | 32% |
| Investor | 0 | 0% | 2,000,000 | 20% |
| Total | 8,000,000 | 100% | 10,000,000 | 100% |
Founder A falls 12 percentage points, from 60% to 48%. The relative reduction is 12 ÷ 60 = 20%. The existing share count stays unchanged. These are different descriptions of dilution, neither a promised payout.
At the same $8 million pre-money basis, increasing new investment to $3 million produces 3 million new shares and an 11 million total. The investor owns about 27.27%, existing holders 72.73%. This sensitivity is arithmetic, not a recommended ownership target.
Copy the scenario worksheet
Scenario / date / proposed or signed: [ ]
Cap table version / source documents: [ ]
Included and excluded instruments: [ ]
Pre-money valuation: [ ]
Agreed pre-round shares: [ ]
Price per share: valuation ÷ included shares
Investment by holder: [ ]
New shares: investment ÷ price
Other share changes: [separate rows]
Post-round total: [ ]
Holder shares / before% / after%: [ ]
Rounding difference and explanation: [ ]
Open questions / counsel / finance owner: [ ]Document source locators and do not label a modeled issuance as approved merely because the percentages sum correctly.
Know when this model is insufficient
Convertibles require their own conversion model. Pool increases require an explicit before/after basis. Secondary purchases do not add company cash. Tranches and multiple closes have conditions and timing. Expand the model with advisers instead of assuming these fit the simple formula.
- Before and after totals equal 100% within rounding.
- New cash equals modeled issue price multiplied by purchased shares.
- Every share movement is explained.
- All holders use one labeled denominator.
- No percentage is described as spendable wealth or guaranteed proceeds.
Continue with multiple SAFE conversions and option-pool increases when relevant.
Informational disclaimer
We are not lawyers. This article is for general education only and is not legal, tax, accounting or investment advice. Check with your attorney or accountant before acting on it.