Dilution is the reduction in existing shareholders' ownership percentage that occurs when new shares are issued — through fundraising, option exercises, convertible instruments, or other mechanisms. FP&A teams model dilution to understand its impact on earnings per share, voting control, and shareholder economics.
In Depth
Dilution is an inevitable consequence of equity financing and equity-based compensation. Every time new shares enter circulation — whether from a funding round, employee option exercise, or convertible note conversion — the existing shareholders' slice of the pie gets smaller.
Dilution can be measured in several ways. Ownership dilution shows the reduction in percentage ownership. EPS dilution shows the reduction in earnings per share. Value dilution occurs when shares are issued below fair value, reducing per-share value.
It is important to distinguish between dilution and value creation. If a company raises £10M at a £50M pre-money valuation, existing shareholders are diluted by 16.7% (£10M / £60M post-money). However, if the funds are deployed to create more than £10M in value, shareholders are better off in absolute terms despite the percentage dilution.
FP&A teams model dilution through the cap table — a detailed record of all shares, options, warrants, and convertible instruments. The fully diluted share count (treating all in-the-money options and convertibles as if exercised) provides the most conservative view of ownership and EPS.
For UK companies, dilution modelling should include: existing shares, EMI/CSOP option pools (typically 10-20% of equity for growth companies), any convertible loan notes, any warrant instruments, and planned future option grants.
Real-World Example
A UK startup has 8M shares outstanding. The founder holds 5M (62.5%). After a Series A raising £3M at a £12M pre-money valuation, 2M new shares are issued (8M / 12M x 3M). Post-round: 10M shares, founder holds 50%. The company also has a 15% EMI option pool (1.5M shares). Fully diluted: 11.5M shares, founder holds 43.5%. The FP&A team models further dilution from a projected Series B and additional option grants.
Related Terms
Earnings per share (EPS) measures the portion of a company's net income allocated to each outstandin...
A share option scheme gives employees the right to purchase company shares at a predetermined price ...
A cap table (capitalisation table) is a detailed record of a company's equity ownership structure, l...
A funding round is a discrete event in which a company raises capital from external investors in exc...
A Series A is typically the first significant institutional venture capital funding round, following...
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