Dilution

The contractual right of existing shareholders to participate in future funding rounds on a pro-rata basis, maintaining their ownership percentage. Pre-emption rights protect early investors from dilution and are a standard provision in shareholders' agreements.

A clause in an investment agreement that protects existing investors from ownership dilution if the company raises a subsequent round at a lower valuation (a down round). Common mechanisms include full ratchet and weighted-average anti-dilution.

A marketplace where existing shareholders in private companies — typically employees, early investors, or founders — can sell their ownership stakes to new buyers before an IPO or trade sale. Secondary markets for private shares have grown significantly, with platforms such as Forge Global and Nasdaq Private Market facilitating transactions that provide liquidity and price discovery for otherwise illiquid private company equity.

A reduction applied to the value of an ownership interest to reflect the lack of a ready market in which to sell the interest quickly and at full value. Also known as a discount for lack of marketability (DLOM), this adjustment is particularly significant for private company valuations where shares cannot be readily traded on a public exchange.

The ownership stake held by a company's founders, typically established at incorporation and subject to dilution through subsequent funding rounds. Founders' equity is usually subject to vesting schedules and may carry different rights from investor shares, reflecting the intangible contribution of the founding team's vision and early-stage effort.

A group of individuals elected by shareholders to oversee company management, set strategic direction, and protect shareholder interests. Investor-backed companies typically include board seats for lead investors alongside founder and independent directors.

Contractual mechanisms that protect existing investors from the dilutive effects of a subsequent financing round at a lower valuation than the round in which they invested. Common forms include full ratchet anti-dilution (which adjusts the conversion price to the new lower price) and weighted average anti-dilution (which adjusts based on the relative size of the new round).

A block of shares reserved for future issuance to employees, advisors, and consultants as equity incentives. Option pools are typically established before fundraising rounds, and their size (usually 10%-20% of fully diluted equity) affects both valuation and founder dilution.

What is a down round and how does it affect founders?

A down round is a funding event where the company's valuation is lower than the previous round, signalling market concerns and potentially triggering anti-dilution consequences for founders.

What is the option pool shuffle and why is it controversial?

The option pool shuffle is a term sheet requirement to create or enlarge the employee option pool before the round, in the pre-money, so the pool's dilution falls on the existing shareholders rather than on the new investor.

What is a pro-rata right?

A pro-rata (or pro-rata participation) right entitles an investor to maintain their ownership percentage by participating in future funding rounds on the same terms as new investors.

What is pre-money valuation?

Pre-money valuation is the implied value of a company before new investment. It determines how much equity an investor receives for their cheque.