Dilution

Dilution occurs every time a company issues new equity — at each funding round, when options vest, and when convertible instruments convert. Founders and early investors are diluted with each new round. Anti-dilution provisions protect investors (but not founders) from dilution if the company raises at a lower valuation in a future round. Managing dilution requires balancing the capital needs of the business against the equity retention needed to keep founders and early team members motivated.