Raising money reduces the percentage a founder owns, and this is described as the cost of capital. But the company is worth more afterwards, so the smaller slice may be worth more than the larger one was.
When is dilution actually bad, rather than just arithmetically smaller?
Accepted Answer
Dilution is bad when the money does not buy growth worth more than the share given up. That is the whole test, and it is why percentage alone tells you nothing.
Twenty percent of a company worth fifty million beats eighty percent of one worth five million. The founder who refused every round to protect the percentage has optimised the wrong number.
The real question at each round is whether the capital raises enterprise value by more than the fraction sold. If a two million raise at a ten million valuation produces less than two million of additional value, that round destroyed value for you even though the headline looks like progress.
The part that genuinely hurts is rarely the percentage though, and it is worth learning to read for it.
Liquidation preferences decide who gets paid first and how much before common shares see anything. A one times non participating preference is standard. Participating preferences, or multiples above one, mean the investor takes their money back and then shares the rest.
With a two times participating preference, a founder holding a large percentage can receive very little from a modest exit. That is not dilution and it will not show up on the cap table percentage at all.
Do not forget the option pool either. It is usually created out of the pre money valuation, which means the founders fund it alone rather than sharing it with the incoming investor.
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