Dilution

Dilution is the reduction in an existing shareholder's percentage ownership following the issuance of new shares that they have not subscribed to proportionally. It results from capital increases, option exercises, convertible bond conversions or free share issuances to third parties (incoming investors, option scheme beneficiaries, convertible note holders). Dilution can be percentage dilution (a reduction in the ownership fraction) or value dilution (a reduction in per-share value when new shares are issued below current fair value, a down round). In fundraising, dilution is accepted by founders in exchange for new capital: its economic impact depends on the price at which new shares are issued relative to the company's pre-money value. Modelling dilution precisely, both immediate and potential (on a fully diluted basis), is essential for cap table modelling, for planning successive rounds, for preserving sufficient founder ownership through to exit, and for assessing the true economic cost of equity financing for existing shareholders.

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Example: a founder holds 100% of a startup valued at CHF 5.0 million pre-money. A Series A of CHF 2.0 million is raised at this valuation: new investors receive 28.6% of the post-money capital (CHF 2.0m / CHF 7.0m). The founder is diluted from 100% to 71.4%, but the value of their stake remains CHF 5.0 million (71.4% × CHF 7.0 million post-money), with expected value growth from deployment of the new capital. Another illustration, on a fully diluted basis: a founder holds 80% of a startup (800,000 of 1,000,000 shares). A Series A raises CHF 3.0 million at CHF 12.0 million post-money (CHF 12 per share), creating 250,000 new shares. Post-Series A, the founder holds 800,000 / 1,250,000 = 64%, a 16-point dilution. If a 10% ESOP pool (125,000 shares) is simultaneously created, fully diluted ownership falls to 800,000 / 1,375,000 = 58.2%, 22 total dilution points.

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Hectelion models dilution impacts precisely across all share classes and multi-round scenarios in fundraising mandates, giving founders and investors clear economic visibility and helping preserve their position through to exit.