Start-up Equity Dilution Calculator
Written by Team Equity 12 January 2024 | 4 min read- Editor's Note :
This equity dilution calculator tool shows how much a founder's equity is diluted when they take on a new capital/round.
Written by Team Equity 12 January 2024 | 4 min readThis equity dilution calculator tool shows how much a founder's equity is diluted when they take on a new capital/round.
You have a grand vision and an idea for a company but are waiting for the right fuel for your business, for which you are in talk in talk with investors. You need to figure out the right balance between shares issued and equity diluted to ensure your stake in ownership. Understanding the numbers is key to maintaining control and setting your venture on the path to success.
Equity dilution in start-ups refers to the decrease in ownership percentage experienced by existing shareholders when new shares are issued. This typically happens during funding rounds, where investors receive shares in exchange for their investment.
It’s like giving a small piece of your pie in exchange for some dough, you can make more pie with the dough and the investors get the pie.
Let's walk through an example to understand it better:
Imagine a start-up with:
The company decides to raise $1 million in a seed funding round: Investors invest $1 million in exchange for 20,000 new shares.
Now let’s dive into how to calculate all these necessary values.
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There are many ways to calculate equity dilution based on the input parameters provided. Let’s discuss one of the ways (which was used in the calculator above too). We’ll touch up upon another way at the end. Before we go into the calculations here are three golden numbers needed:
Other calculations can be extrapolated from these golden numbers.
The number of shares to be issued is calculated based on how much ownership you want to retain, and the change in ownership can be calculated based on the total shares post money and pre-money. Let’s dive into the calculations.
Once you input these three data points, you can see the output in the form of:
| Output | Definition | Formula for calculation |
| Number of Shares to be Issued | Number of new shares to be issued for the investor/partner to get the investment | (Target Ownership / (1 - Target Ownership)) * Current Shares Outstanding |
| Total shares after funding | Total shares after transaction is completed | Outstanding shares + New shares issued |
| Pre-money valuation | Valuation of the company before completing the funding round | Number of shares issued pre-money x price of issued shares |
| Post-money valuation | Valuation of the company after completing the funding round | Pre-money valuation + Funding received |
This calculator can help you identify the pre and post money valuations and the final shares after the funding round.
Understanding all these values is especially vital for startups and founders for their strategic decision-making to ensure that their ownership lies within the threshold they want and they aren’t losing their key rights. Some other factors include:
Overall, a deep understanding of these financial metrics is vital for effective corporate governance, investor relations, and long-term business success.
This calculator takes into consideration some key parameters like target ownership and capital, but in reality, with a greater number of investors it gets more complicated to maintain them. Therefore, it makes it more essential to have a working, real-time Capitalization table or a Cap table to ensure visibility and transparency at all times.
Still, if you looking for some of the other parameters to maintain in your spreadsheets, then those include:
In case you are looking for an advanced template than the one mentioned above with more rounds and investors you can download the free template for equity dilution here.
Get the overview of the Cap Table and the changes done after each round with ease. View your equity shares by ownership, shares, securities, series, and more.
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Vega Equity offers companies an effective, intuitive, and paperless platform for managing equity. It provides accurate cap table management, customized user experiences, and precise information. Additionally, it assists in measuring KPIs, analyzing data, and tracking performance towards goals.
