How does dilution work?

Question

Round 0

• Owner 1: 500k shares (50%)
• Owner 2: 500k shares (50%)

Round 1 (Company raises a $5 million Series A round at $20m post-money)

• Owner 1: 500k shares (37.5%)
• Owner 2: 500k shares (37.5%)
• Investor 1: 333,333 shares (25%)

Round 2 (Company raises $10 million Series B round at $100m post-money)

When there is a second Investor, and lets say he gets 10% for his investment. How does dilution work for the two owners and the first investor? How do you determine the number of new shares issued?

Answer 1

Let x be the number of new shares issued (in thousands). Since the second investor gets a 10% stake,

x / (500 + 500 + 333.333 + x) = 0.10

Solve this algebraic equation for x and you'll find x is roughly 148.148:

x = 0.10 * (500 + 500 + 333.333 + x)
x = 0.10 * (500 + 500 + 333.333) + 0.10 * x
0.9 * x = 0.10 * (500 + 500 + 333.333) 
x = 0.10 * (500 + 500 + 333.333) / 0.9
x ~= 148.148

Therefore, after Round 2, the share ownership would look like this:

|            | shares (K) | % stake |
|------------+------------+---------|
| Owner 1    |        500 |   33.75 |
| Owner 2    |        500 |   33.75 |
| Investor 1 |    333.333 |   22.50 |
| Investor 2 |    148.148 |   10.00 |
|------------+------------+---------|
|            |   1481.481 |  100.00 |