Understanding equity dilution is vital for startup founders and investors, as it helps determine the ownership percentage after each funding round. Our Equity Dilution Calculator enables users to estimate the percentage of ownership diluted after a new round of funding. In this article, we’ll discuss the working of the calculator, the formula behind it, and other essential details.
How the Equity Dilution Calculator Works
To use the Equity Dilution Calculator, follow these steps:
- Enter the initial ownership percentage: Input your initial ownership percentage before the new investment round.
- Enter the new investment amount: Input the amount of new investment received in the funding round.
- Enter the pre-money valuation: Input the company’s pre-money valuation before the new investment round.
- Click “Calculate”: The calculator will display the percentage of ownership diluted after the new funding round.
The formula for estimating equity dilution is as follows:
Diluted Ownership Percentage = Initial Ownership % x (Pre-Money Valuation / Post-Money Valuation)
Where Post-Money Valuation = Pre-Money Valuation + Investment Amount
Suppose a founder owns 50% of a company valued at $2,000,000 (pre-money valuation) before a new funding round. The company receives a new investment of $1,000,000. To calculate the founder’s diluted ownership percentage, input the values into the calculator:
Initial Ownership Percentage = 50% New Investment Amount = $1,000,000 Pre-Money Valuation = $2,000,000
Post-Money Valuation = $2,000,000 + $1,000,000 = $3,000,000
Diluted Ownership Percentage = 50% x ($2,000,000 / $3,000,000) = 33.33%
The Equity Dilution Calculator is a valuable tool for understanding the changes in ownership percentages after a new funding round. By following the simple steps outlined above, users can quickly estimate the ownership dilution and make informed decisions about investments and equity distribution. However, it’s essential to remember that these values are approximate and may vary based on factors such as stock options, convertible notes, and other financial instruments.