Dilution

The reduction in an existing shareholder's ownership percentage when new shares are issued to investors, employees, or through convertible instruments converting to equity.

Dilution is not inherently bad. A smaller percentage of a much larger company can be worth far more. But understanding dilution mechanics before signing term sheets prevents founders from giving away more than they intended.

You own 100% of a company worth £500,000. You raise £250,000 at a £750,000 pre-money valuation. Post-money valuation is £1M. You now own 75% of a £1M company, worth £750,000. You were diluted 25% but gained £250,000 in value.