Startup Dilution in 2026: The '20% Round' That Takes 30% of Your Company
Everyone raising a priced round learns the same sentence: "it's a 20% round." It sounds like a subtraction. Own 50%, give up 20%, keep 40%. Two rounds and you are still at 32%, which most founders can live with.
The subtraction is wrong twice over. Dilution multiplies rather than subtracts, and the percentage in that sentence is rarely the percentage of new shares the round issues — because the option pool the investor requires is created before their money goes in, and so comes out of everyone except them. What follows walks one term sheet through the arithmetic end to end, then stacks a second round on top. Equity terms vary enormously by deal, and none of this is legal or tax advice.
Quick answer
A round described as 20% usually issues considerably more than 20% of the shares, because the new option pool is carved out of the pre-money valuation. On a 1,000,000-share cap table, a $2,000,000 raise at an $8,000,000 pre-money with a 10% pool refresh issues 428,571 new shares — 30% of the 1,428,571 that then exist. A founder holding 500,000 shares goes from 50% to 35%, not to 40%. The pool alone accounts for a third of that loss. Your stake after any round is your stake before multiplied by one minus the share of the company the round sells, and the pool belongs in that share.
Pre-money and post-money are two different questions
If a company has 1,000,000 shares and issues 200,000 to an investor, the investor does not own 20%. There are now 1,200,000 shares, and 200,000 of them is 16.7%. To sell exactly 20% you must issue 250,000 new shares, because 250,000 out of 1,250,000 is 20%. The formula: new shares = existing shares × p ÷ (1 − p), where p is the post-money percentage agreed.
The gap widens fast — 500,000 new shares against 1,000,000 existing sells a third of the company, not half. So the first thing to do with an offer is convert it into shares. Enter the two share counts and your percentage into the cap table dilution calculator and it reports the share of the company the round sells alongside your new stake — two numbers a term sheet keeps separate.
The option pool shuffle, carried end to end
You hold 500,000 shares of 1,000,000 fully diluted, so 50%. Your co-founder holds 350,000; an existing pool for advisers and early hires holds 150,000.
The term sheet: $2,000,000 at an $8,000,000 pre-money valuation, so a $10,000,000 post-money, with the investor taking 20%. It also requires an option pool equal to 10% of the post-money capitalisation, created before the investment closes. A pool is quoted as a percentage of the post-money fully diluted shares; "pre-money pool" describes when it is created, not what it is measured against.
Existing holders therefore keep 100% − 20% − 10% = 70%. Work backwards: if 1,000,000 shares are 70% of the total, the total is 1,428,571.
| Holder | Before | % before | After | % after |
|---|---|---|---|---|
| You | 500,000 | 50.0% | 500,000 | 35.0% |
| Co-founder | 350,000 | 35.0% | 350,000 | 24.5% |
| Existing pool and advisers | 150,000 | 15.0% | 150,000 | 10.5% |
| New option pool | — | — | 142,857 | 10.0% |
| New investor | — | — | 285,714 | 20.0% |
| Total | 1,000,000 | 100% | 1,428,571 | 100% |
Nobody lost a share. The company issued 428,571 new ones — 30% of the post-money total — and every existing holder's percentage fell by three-tenths.
Now run the same round without the pool refresh. The investor still wants 20%, so the company issues 250,000 shares against 1,000,000. You hold 500,000 of 1,250,000: 40%.
So the round that "cost 20%" cost you 15 points with the pool and 10 without. The pool — 10% of the company, none of it yet promised to anybody — took 5 points off your stake, half again as much dilution as the investment itself. Put both versions through the dilution engine and the difference shows up as 428,571 new shares against 250,000.
What the pool did to the price per share
The pool also moves the price.
The pre-money price per share is the pre-money valuation divided by the pre-money fully diluted shares — and a pool created pre-money sits inside that denominator. With it, the denominator is 1,000,000 + 142,857 = 1,142,857, so $8,000,000 ÷ 1,142,857 = $7.00 a share. Without it, $8,000,000 ÷ 1,000,000 = $8.00.
The investor's $2,000,000 buys 285,714 shares at $7.00 instead of 250,000 at $8.00. Their 20% is unchanged; what changed is that the existing holders' 1,000,000 shares are now marked at $7,000,000 rather than $8,000,000. An "$8,000,000 pre-money with a 10% pool" is, from your side of the table, a $7,000,000 pre-money — standard practice rather than sharp dealing, which is why it should be priced rather than argued about.
The shortcut is that the pool's percentage of the post-money is the discount to the pre-money, in dollars: 10% of a $10,000,000 post-money is $1,000,000, and $8,000,000 − $1,000,000 = $7,000,000. Ask for the 15% pool investors more often open with and the same subtraction gives $6,500,000, which is the figure the dilution engine's option-pool answer now states, on the convention it uses everywhere: a percentage is a share of the fully diluted count after the round. Read the other way — 15% of the pre-money — the identical sentence would mean $6,800,000. The gap between those two readings is $300,000 of your money, so the denominator is worth one question at the term-sheet stage.
Negotiable is the size, not the existence. A pool should be sized against a written 12-to-18-month hiring plan, nearer 8% to 10% at seed than the 15% often asked for, and every point talked off it returns to the cap table. A defensible view of what the company is worth helps, because the pool and the valuation are one negotiation wearing two hats.
Now stack a second round
Eighteen months on, the seed pool has been granted to hires and the company raises a Series A: $8,000,000 at a $32,000,000 pre-money, a $40,000,000 post-money, investor at 20%, plus a fresh 5% pool.
Existing holders keep 75%, so 1,428,571 shares become 1,904,761 — an issue of 476,190 new shares, 380,952 to the investor and 95,238 to the pool, at $32,000,000 ÷ (1,428,571 + 95,238) = $21.00 a share. Your 500,000 shares are now 500,000 ÷ 1,904,761 = 26.25%, which rounds to 26.3%. That round alone cost 8.75 points, and sold 25% of the company.
| Shares outstanding | Price per share | Your stake | Your shares at that price | |
|---|---|---|---|---|
| Before the seed | 1,000,000 | — | 50.0% | — |
| After the seed | 1,428,571 | $7.00 | 35.0% | $3,500,000 |
| After the Series A | 1,904,761 | $21.00 | 26.3% | $10,500,000 |
Two rounds, both introduced as "20% rounds", and half the founder's stake is gone. The naive multiplication — 50% × 0.8 × 0.8 — predicts 32%. The actual figure is 26.25%. The missing 5.75 points are the two pools, worth $2,300,000 at the Series A price.
Read the last column too, because the pessimistic version is also wrong. The same 500,000 shares went from a $3,500,000 mark to a $10,500,000 one while the percentage fell nearly nine points. Dilution is a loss only when the money raised fails to grow the company by more than the fraction sold — which is why "how much will I own" and "how much will I be paid" are different questions. The second runs through the preference stack to a take-home from an exit well below your percentage of the sale price.
The rule that survives every round
Your stake after a round = your stake before × (1 − the share of the company the round sells).
- Seed: 50% × (1 − 0.30) = 35%
- Series A: 35% × (1 − 0.25) = 26.25%
Multiply, never subtract — subtracting the headline numbers from 50% gives 10%, as wrong in one direction as 32% is in the other. And the share the round sells is the whole issue, pool included, not the number in the investor's sentence. It is the only figure that composes correctly across rounds; feeding each round's share count in turn through the dilution calculator chains the multiplication for you.
One footnote. Pro-rata rights let a holder buy their percentage of each new issue to stay flat — 35% of the Series A's 476,190 shares is 166,667 — but they are a right investors negotiate and founders usually do not have.
FAQ
Is the option pool always taken out of the pre-money valuation?
No, but it is the market default and worth assuming unless the term sheet says otherwise. The alternative is a post-money pool, created after the investment, which dilutes the new investor alongside everyone else. In the seed example the difference is 5 points of the founder's stake — 35% against 40% — and about $1.00 on the $7.00 share price. If the investor will not move the timing, the negotiation shifts to size.
Two different questions hide in that sentence, and it is worth separating them: when the pool is created, and what its percentage is measured against. The market convention on the second — and the one the dilution engine uses for every percentage it reports — is a share of the fully diluted count after the round. So a 15% pool on a $2,000,000-at-$8,000,000-pre round is 15% of the $10,000,000 post-money, $1,500,000, making the effective pre-money $6,500,000. Measured against the pre-money instead, the same 15% would read as $6,800,000.
Why did my percentage drop when nobody took any of my shares?
Because your shares were divided by a larger number. You held 500,000 of 1,000,000; after the seed you held 500,000 of 1,428,571. Nothing left your account — the denominator grew by 42.9%, so 50% became 35%, and after the Series A, 26.25%.
A term sheet says the investor gets 20%. How many new shares is that?
Existing shares × 0.2 ÷ 0.8 — on a 1,000,000-share cap table, 250,000, not 200,000, which would be only 16.7% of the enlarged company. Add any new pool: a 10% post-money pool takes the issue to 428,571 and the round's real share to 30%. Convert every percentage into a share count before signing, because that is what the charter amendment authorises.
Can I avoid being diluted at all?
Not while raising equity — new shares are the mechanism. Raise at a higher price: $2,000,000 at an $18,000,000 pre-money sells about 10% where the same sum at $8,000,000 sells 20%. Keep the pool sized to a written hiring plan. And extend runway so the next round is priced higher, since dilution per dollar is a function of price.
Sources
- The arithmetic used throughout: stake after = your shares ÷ (shares before + new shares); share of the company sold = new shares ÷ shares after; new shares for a post-money percentage p = existing × p ÷ (1 − p); pro-rata purchase = your percentage × new shares
- National Venture Capital Association, Model Legal Documents — the standard term sheet and charter used in U.S. venture financings, where the pre-money pool convention is set out
- U.S. Securities and Exchange Commission, Form D — the notice a Regulation D priced round triggers within 15 days of the first sale
- Delaware General Corporation Law §242, on the charter amendment authorising a round's new shares
- Internal Revenue Code §409A, which governs the valuation setting option strike prices after a round
General information about how priced rounds and cap tables work, not legal, tax or investment advice. Deal terms — pool timing and size, pro-rata rights, anti-dilution formulas, liquidation preferences — vary widely and are governed by the documents you sign. The figures above are worked arithmetic for one example.