Dilution is arithmetic, not a feeling
Founders argue about valuation and sign away more in the terms. Both deserve the same attention, and only one of them is usually modelled.
At the earliest stage most rounds use convertible instruments — a note or a SAFE — which defer pricing to a later round. Deferring is convenient, and it hides the consequence: the conversion happens all at once, at terms set when leverage has shifted.
Where the dilution actually comes from
| Source | Typical size | Commonly overlooked because |
|---|---|---|
| Priced round | 15—25% | It is the number everyone looks at |
| Converting notes | 5—20% | Caps from an earlier year convert at today's round |
| Option pool refresh | 8—15% | Usually taken pre-money, so founders carry it alone |
| Pro-rata rights | varies | Reduces room for new investors later |
The option pool is the quiet one. A pool created "pre-money" comes entirely out of existing shareholders — which at that stage means the founders. Whether the pool sits before or after the money is a single word in a term sheet and several points of ownership.
A worked example
A company raises on a 5M cap, then a year later raises a priced round at 12M pre-money with a 10% pool refresh taken pre-money. The earlier notes convert at the cap, not at 12M, so they buy a larger share than the headline implies. Founders who modelled only the new round's percentage are routinely several points out.
Common questions
Is a high cap always better?
For the founder's percentage, yes. For the next round, a cap far above what the business can justify creates a down round later, which is costlier than the points saved.
How much runway should a round buy?
Enough to reach the milestone that makes the next round obvious, plus a margin. Eighteen months is the common answer because twelve leaves no room for a slow quarter.