how to calculate stock dilution — practical guide

How to calculate stock dilution

This guide explains how to calculate stock dilution for U.S. equities, startups and crypto token projects. Readers will learn key definitions, formulas, worked numerical examples, modeling tips for SAFEs/convertible notes and option pools, how diluted EPS is computed, and practical cap-table and tokenomics steps — plus recommended tools and Bitget-related pointers.

截至 2025-12-31，据 Morgan Stanley at Work 报道，本指南参考了其对股权稀释的定义和示例以确保时效性与实务相关性。

Definition and fundamental idea

Stock, share or token dilution happens when a company or token project issues additional units so that existing holders keep the same absolute number of units but own a smaller percentage of the total. In short: dilution reduces ownership percentage by increasing total outstanding units. The mechanics are identical across stocks and tokens: percent ownership = units held / total units outstanding, so increasing the denominator lowers every holder’s share unless they acquire more units.

This article repeatedly addresses how to calculate stock dilution with clear formulas and examples so you can model ownership changes across funding rounds, option exercises, convertible conversions and scheduled token minting.

Key terms and concepts

• Outstanding shares: the number of shares currently issued and held by investors, insiders and the public.
• Authorized shares: the maximum number of shares a company may issue under its charter; not all are necessarily issued.
• Fully diluted shares: current outstanding shares plus all potential shares from options, warrants, convertible securities and other commitments.
• Cap table: a tabular record of ownership (shareholders, percentages, share classes) used to model dilution and exit waterfalls.
• Pre-money valuation: company valuation immediately before a new investment.
• Post-money valuation: pre-money valuation plus the new investment amount.
• Price per share: implied share price = pre-money valuation / pre-money share count, or derived from post-money math for investor ownership.
• Option pool: shares reserved for employee incentives, which can be created or top‑up pre- or post-money and change dilution outcomes.
• Convertible securities: SAFEs, convertible notes, convertible preferreds and warrants that convert to equity under defined triggers and terms.
• Diluted EPS: earnings per share metric adjusted for all potentially dilutive securities; used in public company reporting and valuation.

Each of these terms matters when you need to compute how issuing or converting new units changes ownership percentages and financial metrics.

Basic formulas and step-by-step calculations

Key formulas you will use repeatedly when you learn how to calculate stock dilution:

• New ownership % = existing shares / (existing shares + new shares)
• Dilution % (absolute) = old % − new %
• Dilution factor (proportional retained) = 1 − (new shares / (existing shares + new shares)) = existing shares / (existing shares + new shares)
• Post-money valuation = pre-money valuation + new investment
• Investor ownership = investment / post-money valuation
• Implied price per share (priced round) = pre-money valuation / pre-money share count

Treatment notes:

• For a simple issuance: new shares are added to the denominator and existing shareholders’ percentage falls.
• For conversions: compute the number of shares that each convertible instrument converts to based on its conversion mechanics (cap, discount, fixed conversion price) and add those shares to the denominator.
• For options: include only vested-and-exercised or use treasury-stock method for reporting diluted EPS (explained below).

Simple worked example (direct share issuance)

Founder A holds 600,000 shares. The company issues 400,000 new shares to a new investor.

Step calculations:

• Existing shares = 600,000
• New shares issued = 400,000
• New total = 1,000,000
• Founder A new ownership = 600,000 / 1,000,000 = 60%
• Old ownership = 100% (if founder had all shares before issuance)
• Dilution = 100% − 60% = 40 percentage points

This is the simplest form of dilution: the founder’s absolute share count did not change, but ownership dropped from 100% to 60% because the total increased.

Pre-money vs post-money example (investment round)

Company has 1,000,000 pre-money shares and a pre-money valuation of $4,000,000 (implied $4.00 per share). An investor invests $1,000,000 in a priced round.

Step calculations:

• Post-money valuation = $4,000,000 + $1,000,000 = $5,000,000
• Investor ownership = $1,000,000 / $5,000,000 = 20%
• New total shares = pre-money shares / (1 − investor ownership) = 1,000,000 / 0.8 = 1,250,000
• New shares issued to investor = 1,250,000 − 1,000,000 = 250,000 shares
• Founders’ combined ownership = 1,000,000 / 1,250,000 = 80%, so founders diluted from 100% to 80% (a 20 percentage-point dilution).

This shows why investors’ percentage is derived from post-money math; founders should track whether the option pool is carved out pre- or post-money as it changes the required issuance size.

Fully diluted shares — what to include

Fully diluted share count aims to show the maximum possible shares that could be outstanding by converting all potentially dilutive instruments. Include:

• All currently outstanding shares.
• All vested and unvested employee options and RSUs that can convert to shares (depending on modeling assumptions).
• All warrants and convertible preferreds that will convert.
• Shares implied by convertible notes and SAFEs at conversion (use caps/discounts to compute conversion shares).
• Any other contractual commitments to issue shares (e.g., earnouts, vendor shares).

Fully diluted shares are used to compute ownership on a 100% basis, to show dilution risk to existing holders and to calculate diluted EPS for public companies.

Diluted earnings per share (Diluted EPS)

Diluted EPS adjusts basic EPS for the effect of dilutive securities. Basic EPS = Net income available to common shareholders / weighted average common shares outstanding. Diluted EPS adds the effect of potentially dilutive securities to the denominator and may adjust the numerator for items like preferred dividends and interest saved from debt conversion.

General diluted EPS formula (conceptual):

• Diluted EPS = Adjusted net income / (Weighted average shares + dilutive potential shares)

Modelling notes:

• Convertible debt: when assumed converted, interest expense (after tax) is added back to the numerator because the debt interest would no longer be paid.
• Convertible preferreds: preferred dividends are added back to net income when conversion to common is assumed.
• Options and warrants: use the treasury-stock method (Treated as if option holders exercise and company uses proceeds to repurchase shares at average market price) to compute incremental shares.
• GAAP and IFRS provide specific tests to determine whether securities are dilutive in the reporting period.

Diluted EPS can be materially affected by many small instruments, so accurate modeling of exercise prices and market prices is critical.

Convertible instruments and their dilution mechanics

Convertible instruments convert into equity based on contractual terms. Main types:

• Convertible notes: debt that converts into equity at next qualifying round, usually with a discount and/or valuation cap.
• SAFEs (Simple Agreement for Future Equity): convert into equity at a priced round based on cap and/or discount; they typically do not carry interest like notes.
• Convertible preferreds: preferred shares that convert into common on a qualifying event or at investor election.
• Warrants: allow holder to buy shares at a fixed strike price; they convert when exercised.

To compute dilution from any convertible instrument:

1. Determine the conversion formula in the term (cap, discount, or fixed conversion price).
2. Compute conversion price per share and number of shares = instrument principal or cap-derived equity value / conversion price.
3. Add those shares to the post-conversion outstanding shares and recompute ownership percentages.

Because caps and discounts interact with the priced round valuation, it's essential to compute conversions using the same post-money math used for the round.

SAFEs and convertible notes — modeling tips

• Valuation cap: converts as if the priced round valuation were the cap (if cap gives a lower price per share than the actual round price), generating more shares for the holder.
• Discount: holder converts at a percentage discount to the round price (e.g., 20% discount means conversion price = round price * 0.8).
• If both cap and discount apply, conversion uses the more favorable for the investor (lower conversion price).
• Model: compute the effective price per share for each instrument, then number of shares = instrument principal / effective price.
• If the instrument accrues interest (convertible note), include accrued interest in the conversion principal.
• For pro forma cap tables, convert all SAFEs/notes consistently then add resulting shares to the fully diluted denominator.

Always track whether instruments include MFN (most favored nation) clauses or other features that can change conversion math after negotiation.

Employee equity: option pools, RSUs and exercise effects

Option pools are reserved shares for employees and advisors. Important distinctions:

• Pre-money option pool: created or topped up before calculating investor ownership; this increases dilution to founders but is often requested by new investors so pool is available post-close.
• Post-money option pool: created after investor’s ownership stake is set; less dilution to founders at the time of the round.

Exercise mechanics and modeling:

• Unissued but reserved pool shares are included in fully diluted calculations if modeling maximum dilution risk.
• For diluted EPS, only options that are dilutive (exercise price below market price) and not anti-dilutive are included, using treasury-stock method.
• When options are exercised, cash proceeds equal strike price × exercised options. The company may use that cash to repurchase some shares (treasury-stock method) for EPS math.

Model builders should show both pre- and post-money pool scenarios and run sensitivity analyses to show founders’ dilution under different pool sizes and timing.

Anti‑dilution protections and investor-side adjustments

Anti-dilution clauses protect certain investors from share-price based dilution during down-rounds.

Common types:

• Full ratchet: adjusts conversion price of protected shares to the new lower price, effectively giving protected investors the maximum protection — typically very dilutive to other shareholders.
• Weighted-average (broad or narrow): adjusts conversion price based on the size of the down-round; broad-based weighted average includes more shares in the calculation and results in milder protection compared to narrow-based.

How these change dilution math:

• With full ratchet, compute new conversion price for protected preferreds and recalculate conversion shares — founders and common holders will often face larger dilution.
• With weighted-average, recompute using the formula specified in the preferred terms; the result is fewer incremental shares than full ratchet but still reduces founders’ percentages.

Other investor protections that affect dilution:

• Pro-rata rights: allow investors to maintain their ownership by participating in follow-on rounds (limits dilution if exercised).
• Anti-dilution together with issuance caps or approval rights can materially change cap-table outcomes and should be modeled explicitly.

Cap table modeling and scenario analysis

Best practices for cap-table modeling to show how to calculate stock dilution:

1. Start with a clean pre-money cap table: share counts, option pool, convertible instruments and classes.
2. Build a separate sheet for each scenario: priced round with pre-money pool, priced round with post-money pool, note conversion scenario, exit/acquisition paid in stock, and token minting scenarios for crypto projects.
3. For each scenario, compute: post-money shares, new ownership percentages, fully diluted denominator, and implied per-share prices.
4. Build waterfall tables for proceeds distribution in exits (showing liquidation preferences if applicable).
5. Use sensitivity tables to vary round size, valuation, pool size and conversion terms to see dilution impact.
6. Tag rows to show which holders are common, preferred, convertible or option holders and whether their shares are included as diluted in EPS calculations.

Special cases to model:

• Secondary sales where sellers sell existing shares (no new shares issued) — this does not dilute other holders but changes share ownership distribution.
• Share repurchases: reduce outstanding shares and can be anti-dilutive if they reduce the denominator.
• M&A paid with stock: compute new combined outstanding shares and owners’ percentages based on exchange ratios.

Pro-forma cap tables and scenario analyses are indispensable when negotiating terms so founders and investors can see dilution outcomes clearly.

Tools and calculators

Practical tools that calculate dilution and help build cap-table scenarios include Rho, SaaSBuffer, Equidam calculators and Eqvista. These tools commonly compute:

• New ownership percentages after issuance.
• Fully diluted share counts including option pools and convertibles.
• Convertible note/SAFE conversions using caps and discounts.
• Diluted EPS impacts using treasury-stock method inputs.

Recommended inputs to supply any calculator:

• Current outstanding shares and authorized shares
• Pre-money valuation and new investment amount (or explicit new shares)
• Option pool size (pre- or post-money assumption)
• Convertible instrument details (principal, cap, discount, accrued interest)
• Strike prices and number of options/warrants

For Web3 token projects, use tokenomics-specific calculators that accept initial supply, scheduled inflation rates, vesting cliffs and minting schedules.

Note: Bitget provides tools and products for token projects and individual traders; for on-chain wallets we recommend Bitget Wallet as a secure companion when managing tokens or interacting with token issuances.

Accounting, legal and disclosure considerations

Reporting and legal matters when you calculate stock dilution:

• Public companies must follow GAAP or IFRS rules to compute diluted EPS, apply the treasury-stock method for options and disclose potentially dilutive instruments in footnotes.
• Weighted-average shares: EPS calculations use weighted-average shares over the reporting period, not a simple year-end count.
• Disclosure: companies should disclose conceded conversion terms, outstanding options, warrants and debt conversions in financial statement notes.
• Legal constraints: ensure authorized share counts permit the proposed issuances; board or shareholder approvals may be required to increase authorized shares or create option pools.

Always consult legal counsel for proper charter amendments and compliance, and accounting professionals for GAAP/IFRS treatment when preparing financial statements.

Special considerations for public stocks vs crypto tokens

Parallels:

• Dilution in both worlds increases when more units are issued or minted; the ownership percentage math is the same: units held / total outstanding units.

Differences:

• Issuance mechanics: public equities typically require board/shareholder approvals and legal filings; crypto tokens can be minted based on protocol rules or governance votes.
• Metrics affected: in stocks, diluted EPS and market capitalization are key; in tokens, circulating supply, on-chain inflation, staking rewards and token velocity matter.
• Disclosure and governance: public companies follow regulated disclosure regimes; crypto projects vary widely in transparency and governance, and token issuance schedules may be in whitepapers or smart contracts.

For token projects, model scheduled inflation rates, vesting schedules and developer or treasury allocations to compute how token supply growth impacts holders’ percentage ownership and on-chain metrics like staking APRs and circulating supply.

Practical advice for founders and investors

• Negotiate option pool timing: a pre-money top-up increases dilution to founders — ask for post-money pools where feasible.
• Avoid full ratchet anti-dilution if you are a founder; prefer weighted-average protections instead if negotiating investor terms.
• Use pro-rata rights smartly: investors who want to avoid dilution can reserve allocation rights for follow-on rounds.
• Consider trade-offs: raising capital dilutes share percentage but can increase company value; dilution may be acceptable if the post-money value of your stake increases.
• Track fully diluted scenarios regularly and stress-test cap tables under multiple rounds to see cumulative dilution.

When working with token projects, be explicit about mint schedules and inflation caps in governance documents to avoid unexpected dilution for token holders.

Common pitfalls and FAQs

• Q: Is percentage dilution the same as value dilution? A: No. Percentage dilution measures ownership share; value dilution depends on whether the capital raised increases total company value. Your percentage may drop while your stake’s absolute value rises.

• Q: Should I count unissued option pool shares in dilution math? A: For risk-preview and investor disclosure use fully diluted counts including reserved but unissued pool shares. For some legal reporting, only vested/issued options may be counted.

• Q: What’s the difference between full ratchet and weighted-average anti-dilution? A: Full ratchet replaces the conversion price with the new lower price (more dilutive to founders). Weighted-average adjusts conversion price in proportion to the size and price of the new issuance (less dilutive).

• Q: When do SAFEs dilute founders most? A: SAFEs with low valuation caps or large principal amounts convert to many shares in a priced round and can be highly dilutive. Model conversions precisely using the cap or discount terms.

• Q: Can dilution increase the absolute dollar value of my shares? A: Yes — if the capital raised raises the company value sufficiently, your smaller percentage can still be worth more in absolute dollars.

Worked examples and templates

Below are worked examples of progressively complex situations showing how to calculate stock dilution. Use a spreadsheet with these suggested columns for cap-table templates:

• Holder name | Class (common/preferred) | Pre-money shares | Options granted | Exercise price | Post-conversion shares | % ownership pre | % ownership post | Notes

Example 1 — Simple issuance (already shown): founder 600k, new 400k, result 60%.

Example 2 — Priced round with option pool top-up:

• Pre-money shares = 1,000,000
• Pre-money valuation = $10,000,000 (implied $10.00/share)
• New investor invests $2,500,000; investor wants a 15% post-money stake and a pre-money option pool top-up to 10% of post-money.

Model steps:

1. Compute post-money target: investor 15% => post-money valuation = investment / 0.15 = $16,666,667
2. Pre-money valuation implied = post-money − investment = $14,166,667
3. Option pool target (10% post-money) = 10% × post-money shares
4. Solve for new total shares to meet investor % and target pool — this requires iterative or algebraic solution; it shows how pool size and timing materially affect founders.

Example 3 — Convertible note conversion with cap & discount:

• Company has 1,000,000 pre-money shares. Convertible note principal = $200,000 with 20% discount and $2,500,000 valuation cap. New round priced at $3,500,000 pre-money with new investment of $1,000,000.

Conversion steps:

1. Round price per share = pre-money valuation / pre-money shares = $3.50 ($3,500,000 / 1,000,000).
2. Discounted price = $3.50 × (1 − 0.20) = $2.80 price per share.
3. Cap-based price = valuation cap / pre-money shares = $2.50 ($2,500,000 / 1,000,000).
4. Use lower price for conversion: $2.50 => conversion shares = $200,000 / $2.50 = 80,000 shares.
5. Add converted shares to denominator and recompute investor allocations and founders’ dilution.

Example 4 — Diluted EPS calculation (simple):

• Net income = $1,000,000
• Weighted average shares = 2,000,000
• Unexercised options: 100,000 options with strike $5.00; average market price = $10.00

Treasury-stock method incremental shares = options − (options × strike / market price) = 100,000 − (100,000 × $5 / $10) = 50,000 incremental shares

Diluted shares = 2,000,000 + 50,000 = 2,050,000

Diluted EPS = $1,000,000 / 2,050,000 = $0.4878 per share

Use these templates and spreadsheet columns to replicate computations across scenarios.

Glossary

• Pre-money: valuation before new investment
• Post-money: valuation after new investment
• Cap: valuation cap on a SAFE or note
• Discount: conversion discount for SAFEs/notes
• Anti-dilution: contractual protection adjusting conversion price in down-rounds
• Fully diluted shares: total shares assuming all convertibles and options convert
• EPS: earnings per share
• Option pool: reserved shares for employees
• SAFE: Simple Agreement for Future Equity
• Convertible note: debt that converts into equity
• Warrant: right to buy shares at a strike price

References and further reading

Selected authoritative resources and calculators used to cross-check concepts and examples (resource names only, no external links):

• Equidam — Dilution 101: Calculation And Examples (calculator and examples)
• Medium — How valuation and dilution works: a guide for the mathematically inclined (practical derivations)
• Arc — Equity Dilution in 2025 (industry trend discussion)
• Morgan Stanley at Work — What is Equity Dilution? A Guide (practical workplace guide)
• Rho — Equity dilution calculator (interactive calculator)
• Eqvista — Share Dilution: Complete Guide (cap table tooling and guidance)
• SaaSBuffer — Equity Dilution Calculator (startup-focused calculator)
• Investopedia — What Are Fully Diluted Shares? (reference definition)
• AccountingTools — Diluted earnings per share formula (accounting treatment)
• Salto X — What is share dilution and how to calculate it? (practical examples)

Notes on scope and use

This article explains how to calculate stock dilution for U.S. equity and crypto token contexts and provides worked examples and templates. It is educational, not legal or accounting advice. Consult legal and accounting professionals for contract negotiation or formal financial reporting.

Further exploration: explore Bitget’s educational resources and tools to help manage tokenomics and token holdings, and use Bitget Wallet to securely interact with token distributions and on-chain conversions. For hands-on cap-table building, export data into a spreadsheet and test scenarios before signing financing documents.

Thank you for reading; to explore practical cap-table templates and board-ready reports, consider trying Bitget’s educational toolkit and Bitget Wallet for token projects.