Understanding Equity Dilution in European Startups
Every time a startup raises funding, new shares are issued to investors. This reduces the percentage ownership of existing shareholders — a process called dilution. Understanding dilution is critical for founders negotiating term sheets and building long-term value.
Pre-money vs Post-money Valuation
Pre-money is the company's value before investment. Post-money = pre-money + investment. The investor's equity percentage = investment / post-money valuation.
The Option Pool Shuffle
Investors typically require the option pool to be created or topped up before investment, so it dilutes existing shareholders rather than new investors. This is called the "option pool shuffle" and can significantly increase founder dilution beyond the headline number.
FAQ
What is equity dilution?
Dilution occurs when a company issues new shares, reducing existing shareholders' percentage ownership. Founders experience dilution with each funding round as new investor shares are issued.
How much dilution is normal per funding round in Europe?
Typical dilution per round: Seed 10–20%, Series A 15–25%, Series B 10–20%. Total founder dilution to Series B is often 40–60% depending on option pool and round sizes.
What is an option pool and how does it affect dilution?
An option pool (ESOP) reserves shares for employee stock options. Investors typically require an option pool to be created before (pre-money) investment, which dilutes founders. Standard pool size is 10–20% of post-round cap table.
How is Luxembourg equity structured?
Luxembourg SARLs issue 'parts sociales' (shares). A SARL-S can have €1 minimum capital. Standard SARL requires €12,000. For institutional investment rounds, many Luxembourg startups convert to SA (société anonyme) which offers more flexibility for equity structures.