When a company raises money by issuing new shares, the founders keep the same number of shares they held before, but the total number of shares increases, so their percentage of the company goes down. That is dilution, and it is a normal part of raising money. The real question for founders is whether the money being raised is worth the ownership it costs.
The percentage is only part of the picture, because how much a founder receives on a sale, and how much say they have in decisions, also depends on liquidation preferences and consent rights that sit alongside the shareholding. For that reason, it helps to start with a simple calculation and then add the other terms one at a time.
What is changing the share count?
Before calculating anything, it is important to be clear about what is happening to the share count. A new issue of shares increases the total, while a transfer only moves existing shares between people. A share split or consolidation changes everyone's number of shares without changing anyone's percentage.
Issued shares show who legally owns the company today. A fully diluted figure also counts options and convertible instruments such as SAFEs, including the unallocated option pool, on assumptions that should be stated clearly. The same basis should be used throughout the calculation, otherwise the founders and investors will end up comparing different numbers.
The starting share count must also match the company's cap table and be supported by completed allotments and transfers, so any discrepancy should be fixed before it affects the price of the new shares.
A simple priced round
Suppose a company has 1,000,000 shares and nothing else outstanding, and it agrees a pre‑money valuation of $4 million. The price per share is then $4, so an investor who puts in $1 million receives 250,000 new shares and owns 20% of the 1,250,000 shares now in issue. A founder who held 500,000 shares had 50% before the round and holds 40% after it.
The post‑money valuation in this example is $5 million, which is simply the pre‑money valuation plus the new money. It is a negotiated figure used to price the round, so it does not tell you how much cash the company has, and it is not the valuation used for tax or for pricing employee options, which follow their own rules.
If the investor asks for the option pool to be increased and for the increase to be counted in the pre‑money share count, the price per share goes down and the founders bear the whole cost of the increase. That should be built into the calculation from the start, and I explain how the timing of a pool increase decides who pays for it in planning an option pool around hiring.
Add the convertibles under their own terms
Every outstanding SAFE and convertible note will usually convert in the round, so each one has to be included in the model. For notes, the first question is whether accrued interest converts together with the principal, after which the cap or discount is applied. Each instrument defines which shares count in its own conversion formula, and the model has to follow those definitions.
Pre‑money and post‑money SAFEs treat later convertible money differently, so they should be modelled together in the order the documents require. I explain the difference, and why the quick estimate of dividing the investment by the cap can be misleading, in how pre‑money and post‑money SAFEs affect ownership.
Promised option grants and side letter rights should also be visible in the model. A pro rata right is only a possible extra investment, while a conversion right is already a commitment, so possible scenarios should be shown separately from the figures for the round actually being closed.
Rights to take part or to adjust
An investor with pro rata rights can put more money into the round to keep its percentage. The documents set out the notice and allocation process, and the timetable for the round has to leave enough room for it.
Pre‑emption rights need to be checked as well, both under CAMA and under the articles or shareholders' agreement, because existing shareholders may have to be offered the new shares first, or sign waivers, before the company can issue shares to a new investor. CAMA and the amendments made since set out the corporate procedure, which applies alongside the rights the parties have negotiated.
Anti‑dilution provisions protect earlier investors if a later round is priced lower. A full ratchet resets their price to the new lower price and can be very costly for founders, while a broad‑based weighted average adjusts the price more gently and is what most investors accept. A down‑round calculation should always be run on the actual wording before these terms are agreed.
Control and sale proceeds follow other rights
Board seats and investor consent rights decide control as much as voting percentages do. A minority investor with a veto over new borrowing or a sale can block that decision even where the founders hold most of the shares, so those rights should be read alongside the ownership model.
On a sale, creditors are paid first, and the remaining money is divided according to the share‑class waterfall, in which liquidation preferences and participation rights decide what each class receives and option holders must pay their exercise price. I work through these terms with an example in what to look for in a term sheet.
It also helps to think about what the money is for. The spending plan and runway should be modelled against the milestones the company needs to reach before its next round, and that plan compared with the ownership each offer would cost. Sometimes a larger round at a lower valuation is the better choice, if it takes the company further than a smaller round would.
Make the final records match
At completion, the subscription amounts and final share numbers should be reconciled, including rounding and the conversion of every SAFE and note. They should then be checked against the board and shareholder approvals, the return of allotment filed at CAC and the updated register, and any difference from the model used in negotiation should be explained before anyone signs.
The negotiation models can be kept with their assumptions, but the completed round should be saved as a separate, dated cap table. The next investor will need the real position, and it should be easy to tell apart from the scenarios used during negotiation.
This article is general information and not legal advice. For guidance on your specific circumstances, speak with us directly.