Dilution loss refers to the reduction in the percentage interest of an existing investor when a company issues new shares at a price below the fair value of the existing shares — typically occurring in a down round. It is distinct from pure dilution (which is merely a reduction in percentage ownership) in that it also involves a reduction in economic value per share for existing holders. In business valuation and financial instrument valuation, dilution loss is quantified using the OPM (Option Pricing Method) or the PWERM (Probability-Weighted Expected Return Method) in complex capital structures.

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Example: an investor holds 20% of a company at CHF 100 per share. A down round issues new shares at CHF 60. Without anti-dilution protection, the investor's effective cost basis is diluted upward while the market price falls — creating a dilution loss. With a broad-based weighted average anti-dilution mechanism, the investor receives additional shares to partially compensate for this dilution loss, at a cost borne by common shareholders.

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Hectelion quantifies dilution losses in complex capital structures for PPA, litigation and fundraising valuation purposes.