According to the SmartUp methodology, dilution is a mathematical certainty determined by the company’s valuation before and after an investment. It is calculated based on the Post-Money Valuation, which is the value of the company immediately after the cash is deposited. For example, if a company has a Pre-Money Valuation of $10 million and raises $5 million, the Post-Money Valuation becomes 15million.Theinvestorsnowown335M / $15M), and the founders are diluted by that same percentage. At the seed stage, if a founder raises $1 million at a $4 million Pre-Money valuation, the Post-Money becomes $5 million, the investor receives 20% of the equity, and the founders retain 80%.
Yonatan Stern highlights that the most dramatic dilution event often occurs before any investors are involved: bringing on a co-founder. When a founder brings on a partner and splits the company 50/50, this results in an immediate 50% dilution, which is often far more expensive than raising money from an angel investor who may take only 20–25% in exchange for versatile capital.
Dilution compounds over time through multiple funding rounds. In the case study of a founder named “Joe,” ownership erodes from 100% to 50% after adding a co-founder, then to 40% after a seed round, to approximately 26% after a Round A, and finally to less than 7% after additional rounds and a down round. This cumulative effect is described as a “death spiral,” especially when burn rate is high and valuations drop.
Strategically, high dilution creates an exit trap. Founders who own a small percentage of the company are forced to aim for very large exits to see meaningful returns. The SmartUp alternative advocates for modest investment, where raising less capital results in less dilution and higher retained ownership. In these scenarios, even smaller exits or ongoing profit distributions can generate significantly more personal wealth for founders than large exits in highly diluted companies
