You can calculate exactly how much a new funding round and an option pool expansion will shrink your ownership with a spreadsheet and four numbers: your current shares, the investor's dollars, the price per share, and the required pool size. The core mechanic is simple — dilution is just arithmetic on new share issuance — but two term-sheet choices drive most of the outcome: whether a new employee option pool is created, and whether that pool is calculated pre-money or post-money. This guide walks through a complete numerical example, adapted from a scenario used by EquityList, an equity management platform, to illustrate cap table modeling.
Understanding Your Cap Table and Equity Dilution
A capitalization table — cap table — records a company's ownership structure, detailing who owns what stake and its value. As EQT's ThinQ education team explains, cap tables are essential tools for understanding and managing company equity, financial planning, and fundraising, and they are updated regularly to reflect changes in ownership over time. In its simplest form, per Promise Legal's cap table template guidance, a cap table is a spreadsheet listing all shareholders, their ownership percentages, and equity value.
Equity dilution is the decrease in an existing shareholder's ownership percentage that occurs when a company issues new shares. EQT's ThinQ distinguishes this from value dilution, which happens when a shareholder's stake decreases in value — usually because new shares were issued without a proportional increase in the company's overall value. The two are not the same: as CRV, a venture capital firm, puts it in its founder's guide, "dilution sounds like a loss, but when each round raises the company's fair market value faster than your percentage shrinks, you end up with more wealth on a smaller slice."
For founders, the practical takeaway is that the cap table is a forward-looking model, not just a record. EQT's ThinQ notes that cap tables can be used to assess the impact of future funding rounds on existing shareholders, and that ownership can change quickly during a startup's initial stages of growth. That is exactly what the worked example below demonstrates.
Key Factors Driving Founder Dilution
CRV identifies several common mechanisms through which founders lose ownership: priced funding rounds, employee stock option pools, SAFEs and convertible notes, and pro rata rights exercised by existing investors. In a priced Series A round, two of these dominate.
The first is the investment itself. When a VC buys newly issued shares, every existing shareholder's percentage shrinks in proportion to the new share count. The second is the employee option pool. Investors frequently require a fresh or expanded pool reserved for future hires before closing, and those reserved shares count as outstanding for ownership purposes even though no employee holds them yet. Promise Legal's guidance is to reserve 10–15% of equity for employee grants, with 10% a common choice; Ledgy, an equity management platform, similarly describes typical pools in that range.
Both mechanisms compound. A round that looks like "25% to the investor" can cost a founder meaningfully more once a required pool top-up is layered in — which is why EquityList argues companies should model scenarios before raising, to understand maximum dilution and avoid surprises at the next round.
Pre-Money vs. Post-Money Option Pools: What Founders Need to Know
The second negotiation lever is how the pool is sized. A pre-money option pool is calculated based on shares outstanding before the new investment: the pool is carved out of the pre-money capitalization, so existing shareholders absorb the dilution before the new investor's stake is set. Ledgy's guidance is direct on the asymmetry: "Pre-money option pools are generally considered investor-friendly because they dilute founders and existing shareholders without reducing the new investor's ownership stake."
A post-money pool is calculated based on shares outstanding after the new investment, so the dilution is shared proportionally by everyone — including the incoming investor. In Ledgy's framing, post-money pools are more founder-friendly because the new investor also bears part of the pool's cost. Ledgy adds a scaling note: as a company raises successive rounds and hires more employees, the pool typically needs to grow, and it is best practice to model the pool's growth alongside each funding round.
In practice, the distinction changes who pays for the reserved equity, not whether dilution happens. The worked example below uses the more common pre-money convention — pool sized as a percentage of post-round fully diluted shares, with existing holders absorbing it — so you can see the full cost land on the founder.
Worked Example: Modeling Founder Equity Dilution
This calculation walks through a hypothetical Series A based on the scenario EquityList uses to illustrate ownership modeling. All figures are illustrative, not financial advice. You can rebuild each step in a spreadsheet with one row per shareholder and a formula for percentage: shares owned divided by total shares outstanding.
Step 1 — Initial cap table. The company has 100,000 shares outstanding: founders hold 60,000 (60%), early investors hold 20,000 (20%), and 20,000 shares (20%) are reserved for the employee option pool.
| Holder | Shares before | % before | Shares after round | % after round | Shares after pool top-up | % after pool top-up |
|---|---|---|---|---|---|---|
| Founders | 60,000 | 60.0% | 60,000 | 45.0% | 60,000 | 42.4% |
| Early investors | 20,000 | 20.0% | 20,000 | 15.0% | 20,000 | 14.1% |
| Option pool (reserved) | 20,000 | 20.0% | 20,000 | 15.0% | 28,333 | 20.0% |
| Series A investor | — | — | 33,333 | 25.0% | 33,333 | 23.5% |
| Total | 100,000 | 100% | 133,333 | 100% | 141,666 | 100% |
Step 2 — New investment. The VC invests $5 million at $150 per share for a 25% stake. New shares issued: $5,000,000 ÷ $150 = 33,333. Total shares become 133,333. The founders' 60,000 shares now equal 45.0%; early investors fall to 15.0%; the reserved pool falls to 15.0%; the VC holds 25.0%.
Step 3 — Option pool top-up. The term sheet requires a pool equal to 20% of post-round fully diluted shares (a pre-money-style pool, sized at closing). Solve for the top-up x: existing reserved 20,000 plus x must equal 20% of the new total (133,333 + x). That gives 20,000 + x = 0.20 × (133,333 + x), so 0.8x = 6,667 and x ≈ 8,333 new reserved shares. Total shares: 141,666.
Step 4 — Founder dilution. The founders' 60,000 shares unchanged, but their stake falls from 60.0% to 60,000 ÷ 141,666 = 42.4% — a 17.6 percentage-point loss, of which 15 points came from the investment and roughly 2.6 points from the pool requirement. The VC's stake also mechanically drops to 23.5% under this pre-money convention; in a post-money pool structure, the pool percentage would be computed on the post-investment share count so the incoming investor shares that cost proportionally.
Two boundaries on this model: it excludes complex instruments — EquityList's full scenario adds warrants exercisable at $160 per share, which would dilute further if exercised — and it does not cover convertible notes, SAFEs, or anti-dilution provisions. It is illustrative and is not legal advice on equity structuring.
Monitoring Your Equity: A Founder's Next Steps
Founders should regularly update and model their cap table to understand the impact of future funding rounds and option pool changes on their personal equity stake — the same discipline Promise Legal frames as dilution modeling before Series A, B, and C. The reusable method is the one above: track total shares outstanding, compute new issuances from price and investment amount, solve for any required pool top-up, then recalculate every holder's percentage.
The measurable indicator to watch is your updated ownership percentage in your cap table after each new equity event or option pool adjustment. In the example, that number moved from 60.0% to 42.4% across one round and one pool top-up; knowing precisely which term-sheet choice drove each slice of that loss is what lets you negotiate the next one deliberately.
