Understanding dilution is critically important for an entrepreneur who has cofounders or who plans on raising venture capital money to help grow their startup.
Dilution refers to a decrease in the ownership position of a company. Equity is a primary criteria in venture capital investment and is the heart of venture capital. The concept of dilution is a major factor to consider in deciding upon a financing strategy. By definition, bringing in an equity investor means that that the new party will be taking part ownership of the company.
Concept of dilution was the backbone of very popular movie “Social Network” which dealt with equity among founders, friends and VCs.
Lets try to understand the concept from the scratch –