The math of dilution: what a $5M raise actually costs you over 18 months

Founders think about dilution one round at a time. Investors think about it three rounds out.

Take a clean example. You raise $5M at a $20M post-money valuation. The fund takes 25% of the company. Your team — let's say it was 80% before this round — is now sitting at 60%. That's the headline. You knew that going in.

Now move 18 months. The investor wants you to top up the ESOP pool to 12% before the next round opens. That comes entirely out of the founders' and existing investors' share, not the new money. You drop to roughly 55%. You raise a Series B at $40M post-money, and the lead takes 20%. You're now at 44%. The Series A investor has been pulled down to 20%. Your team's psychology shifts somewhere in there — usually around the second top-up.

Now the liquidation preference. The Series A had a 1x non-participating preference. The Series B asked for 1x non-participating too. On a $200M sale, you do not feel it. On a $40M sale, you absolutely do. The investors get their money back first; you and the team divide what's left. Most founders only learn this on the way out.

What we do in the readiness assessment is run this math at engagement. Not the optimistic version — the realistic one. Two rounds out, an ESOP top-up at each, a market-standard preference stack, and what the exit looks like in the bottom half of likely outcomes. We do not show this to investors. We show it to you. The point is that you walk into the term sheet conversation knowing what you are agreeing to two rounds from now, not just at the closing.

Some of what we run sees founders push back on the headline valuation in favour of cleaner terms — a 1x non-participating preference instead of 1.5x, no anti-dilution carve-outs, an ESOP top-up timed after the round instead of before. The headline number is what gets press-released. The terms are what you live with.