Dilution analysis is the modeling exercise that forecasts ownership shifts after current and future financings — essential before accepting term sheets or granting large option packages.

How it works

Analysts start from today’s fully diluted cap table: common, preferred, options, warrants, SAFEs, and notes. They layer the proposed round — pre-money valuation, new money, option pool target — and calculate post-close ownership.

Advanced models stack multiple rounds, down-round anti-dilution, pro rata participation, and exit waterfalls with liquidation preferences.

Founders should compare scenarios: flat round vs up round, with and without note conversion, and sensitivity to pool size. Investors verify that SAFE stacks and side letters match founder representations.

Tools include Carta scenario modeling, counsel spreadsheets, and cap table scenario templates. Outputs drive negotiation on valuation, pool, and whether notes convert at cap or discount.

Why it matters

• Founders: Know your ownership at exit under realistic paths — not just best-case IPO headlines.
• Investors: Dilution analysis catches broken cap tables early — mispriced notes, missing pro rata, or insufficient pool for hiring plan.

Common mistake

Modeling only the current round while ignoring unissued SAFEs and promised refreshes. Fully diluted means everything that could convert, not just what’s outstanding today.

Related ideas

See also dilution, cap table scenario, liquidation waterfall, and term sheet modeling.