पाठशाला Pathshala · धन Dhan, Money · Lesson 03 · Start

Dilution: a cap table you can touch

Every round sells a share of the company equal to money raised over post-money, and everyone who was already there shrinks by the same factor. That one sentence, and what it does to founders over three rounds.

Pathshala, The Founder Library · 10 October 2026 · 4 min read

Founders learn dilution the expensive way, in the week between a term sheet and a signature, with a lawyer explaining why the pool comes out of their side. It is better learned on a Tuesday afternoon with a slider. The mechanics are simple; the consequences are not.

One sentence of arithmetic

Pre-money valuation is what the company is agreed to be worth before the new money arrives. Post-money is pre-money plus the money. The new investor’s share is the money divided by post-money. Raise ₹3 crore at a ₹15 crore pre-money and the post-money is ₹18 crore; the investor owns 3 ÷ 18, which is 16.7 per cent.

Everyone who already held shares now holds the same number of shares in a bigger company, so each of their percentages is multiplied by one minus the new investor’s share: by 0.833 in this example. Two founders at 45 per cent each become 37.5 per cent each. That is the whole of dilution. Everything else is detail about who is counted as already there.

The detail that costs the most: the pool

Investors expect an employee option pool, usually ten to fifteen per cent of the company after the round, and they expect it to exist before they invest, inside the pre-money. The effect is that the pool is carved out of the founders alone, not shared with the incoming investor. In the tool, move the pool slider and watch the founders’ bar shrink while the investor’s does not.

This is negotiable in two ways. First, the size: a pool sized to the hires you will actually make before the next round is defensible; a pool sized to a template is not. Index Ventures’ Rewarding Talent handbook has the best public data on how much equity early employees receive by role and stage, and is the right thing to carry into that conversation. Second, the timing: a pool created after the round dilutes the investor too, and a term sheet that insists on pre-money creation is asking you to pay for it alone. Knowing that is worth two or three percentage points to the founders, which at a Series B post-money is real money.

What rounds look like in India

The instruments differ from the American ones a founder reads about. Institutional investors in Indian private companies generally take compulsorily convertible preference shares, CCPS, which carry a liquidation preference and convert into equity at a later event. Angels often take equity directly or CCPS alongside the fund. The Indian answer to Y Combinator’s SAFE is the iSAFE, introduced by 100X.VC, which is structured as CCPS to fit Indian company law rather than as a contractual promise of future shares; a plain SAFE does not work cleanly here because the Companies Act does not recognise it as a security.

The valuation side also changed recently. For a decade the angel tax under section 56(2)(viib) of the Income-tax Act treated money raised above a tax officer’s view of fair value as income, which made every early round a potential dispute. The Union Budget of July 2024 abolished it for all classes of investor. Valuation reports from a merchant banker are still part of the paperwork for preference shares; the tax exposure that made them frightening is gone.

What founders keep, and why that is fine

Run the default settings: a ten per cent pool, a ₹3 crore seed at ₹15 crore pre-money, a ₹25 crore Series A at ₹100 crore, an ₹80 crore Series B at ₹400 crore. The founders together end near forty-five per cent. Two founders hold a little over twenty per cent each of a company valued at ₹480 crore, which is a stake worth about ₹100 crore each on paper.

You did not lose fifty-five per cent of the company. You bought a company worth thirty times more with it.

The question at each round is therefore not how much is sold but whether the money buys more growth than the share it costs. A round that sells twenty per cent and triples the company’s value in eighteen months paid for itself several times. A round that sells twenty per cent to extend a business that is not growing paid for a slower death, which is the one scenario in which dilution really is a loss.

Four things to check before you sign

The pool is in the pre-money. Ask for it to be sized to a hiring plan, in writing, and push for the unallocated part to be excluded from the next round’s pre-money.

The liquidation preference is one times, non-participating. One times means investors get their money back first in a sale; non-participating means they then choose between that and their percentage, not both. Anything above one times, or participating, moves money from founders and employees to investors in every outcome but the best one.

Anti-dilution is broad-based weighted average, not full ratchet. This decides what happens if a later round is priced lower. Full ratchet reprices the earlier investor’s entire stake to the new lower price and can wipe out a founder in a down round.

The model matches the documents. Build the cap table in a sheet, round by round, including the pool and the conversion of any CCPS, and have your lawyer confirm it matches the shareholders’ agreement before signing. The tool above is a teaching instrument; the sheet is the record.

None of this is legal or tax advice. Terms differ, law changes, and a good lawyer who has closed Indian rounds is cheaper than any mistake described here.