Why Cumulative Dilution Compounds Non-Linearly
Single-round dilution is straightforward: a 20% dilution round reduces every existing holder's ownership by 20%. Four rounds of 20% each does not yield 80% total dilution; it yields 1 - 0.8⁴ = 59% dilution. The multiplicative nature compounds gently but consistently.
The non-linearity intensifies when option pool refreshes are layered in. A 15% pre-money option pool refresh effectively dilutes existing shareholders by ~15% on top of the round dilution. Two rounds of 20% dilution each with 15% pool refresh each = 1 - (0.8 × 0.85)² = 53% dilution, materially more than 20% × 2 = 40%.
Anti-dilution adjustments in down rounds add a third compounding layer. A weighted-average down round can transfer 3–10 percentage points from common to preferred — applied on top of the round dilution and the pool refresh. Three of these mechanisms stack: round dilution × pool refresh × anti-dilution. The compound effect is why founders are repeatedly surprised at how little they own by Series B.
Model Inputs
A complete dilution model requires the following inputs per round:
• Pre-money valuation (EUR or USD, consistent with cap table currency) • Round size (EUR) • Option pool top-up percentage (post-money fully diluted) • Convertible conversion parameters (cap, discount, instrument types) for any SAFEs or CLAs converting at this round • Anti-dilution flavour for prior round preferred (broad-based weighted average is standard) • New investor pro-rata exercise assumptions (full / partial / none) for prior round investors
Model outputs per round: • Pre-money cap table (fully diluted, post-conversion of any converting instruments) • Round mechanics (price per share, new shares issued, pool refresh shares issued) • Post-money cap table by holder category • Founder ownership % at post-money • Investor ownership % by class at post-money
The model should support scenario sensitivity (conservative / base / aggressive) for each input. The most useful sensitivities are pre-money valuation and option pool top-up — these two inputs drive the vast majority of round-to-round founder dilution outcomes.
Four-Round Worked Example
Starting cap table: • Founders: 8,000,000 Common (100%)
Round 1 — Pre-Seed SAFE: €300K raised on €3M post-money cap, 20% discount. SAFE does not affect cap table until conversion. Fully diluted unchanged: 8,000,000 shares founders own 100%.
Round 2 — Seed: €1.5M raised at €7M pre-money. SAFE converts at €3M cap (more favourable to SAFE holder than 20% discount on €7M = €5.6M effective). Pool refresh to 12% post-money.
• Pre-conversion: 8,000,000 founders + SAFE → at €3M cap, SAFE buys 10% of pre-conversion FD. SAFE shares: 8,000,000 / 9 = 888,889 → SAFE holder gets 888,889 / (8,000,000 + 888,889) = 10%. • Pre-money cap: 8,000,000 + 888,889 = 8,888,889 (founders 90%, SAFE 10%). • Pool refresh to 12% post-money: post-money FD will be (pre-money + new investor shares + pool top-up). Solve iteratively. Pool top-up shares ≈ 1,500,000. Pre-money FD with pool: ~10,388,889. • New investor shares: €1.5M / €8.5M = 17.6% of post-money. Post-money FD: 10,388,889 / 0.824 = ~12,610,000. New investor shares: ~2,221,000. • Founders: 8,000,000 / 12,610,000 = 63.4%.
Round 3 — Series A: €6M raised at €20M pre-money. Pool refresh to 15% post-money. • Pre-money FD with new pool: ~14,800,000. • New investor: €6M / €26M = 23.1% of post-money. Post-money FD: ~19,250,000. • Founders: 8,000,000 / 19,250,000 = 41.6%.
Round 4 — Series B: €15M raised at €60M pre-money. Pool refresh to 10% post-money. • Pre-money FD with new pool: ~21,400,000. • New investor: €15M / €75M = 20.0% of post-money. Post-money FD: ~26,750,000. • Founders: 8,000,000 / 26,750,000 = 29.9%.
Founder ownership trajectory: 100% → 90% → 63.4% → 41.6% → 29.9%. The compound effect of four rounds with reasonable terms produces ~30% founder ownership at Series B.
Option Pool Sensitivity
Option pool top-up size is one of the two most important sensitivities. A 10% pool vs. a 15% pool at Series A translates to ~5 percentage points of additional founder dilution.
Why the variation: lead investors prefer larger pools because they reduce the need for further dilution in the post-Series-A period before Series B. Founders prefer smaller pools because the dilution comes from pre-money (i.e. from existing shareholders, not from the new round investor). The pool refresh is a negotiation, not a market standard.
The right size depends on hiring plans for the 18–24 months post-round. Build a hiring plan (number of hires by role and seniority), apply expected option grants (e.g. VP-level 0.5–1%, senior IC 0.1–0.25%), and total the grants needed. The pool should be 1.2–1.5× the total of planned grants (with buffer for unexpected hires and refresh grants). If the math says 8%, push hard against a 15% demand. If the math says 14%, accept the 15%.
The aggregate option pool refresh effect across all rounds is enormous: 10–20 percentage points of total founder dilution attributable purely to pool refreshes. See [option pool shuffle](/captable/option-pool-shuffle), [esop](/captable/esop), and [equity dilution](/captable/equity-dilution).
Using the Model as a Negotiation Tool
The model is most valuable not as a forecast but as a negotiation aid at each round. Three concrete uses:
1. Quantifying term-sheet asks. A founder presented with '€18M pre-money, 18% post-money pool' can immediately calculate that this is equivalent to ~€15.5M pre-money on a 12% pool basis. The pool ask is hidden additional dilution; the model surfaces it.
2. Comparing competing term sheets. Two term sheets at different valuations and pool sizes are rarely directly comparable. The model produces founder ownership at post-money — the only metric that actually matters. Sometimes the 'lower valuation' term sheet produces higher founder ownership because of smaller pool refresh.
3. Sequencing decisions. Should we raise €1M now or €1.5M now? The model projects the cap table at each subsequent round under each scenario. Sometimes the smaller round produces better long-term ownership because the next round is at a stronger valuation.
The model is also a planning artefact. Reviewing it quarterly with the founding team aligns expectations about long-term ownership outcomes and grounds compensation discussions (equity refresh grants, founder secondaries) in realistic projections. See [pre-money post-money valuation](/captable/pre-money-post-money-valuation), [series A](/captable/series-a), [fully diluted capitalization](/captable/fully-diluted-capitalization), and [equity refresh grants](/captable/equity-refresh-grants).