Dilution and cap tables

Pre-money, post-money, and the sentence that costs money

Pre-money valuation is what the company is agreed to be worth before the investment. Post-money is that figure plus the new capital. The investor's stake is their money divided by the post-money valuation.

Worked through: a business agrees a pre-money valuation of R40m and raises R10m. Post-money is R50m, and the investor owns 10 divided by 50 — 20%. The founders, who owned 100%, now own 80%.

Now the same conversation conducted carelessly. If "we agreed R50m" turns out to have meant post-money, the pre-money was R40m and the outcome is as above. If it meant pre-money, post-money is R60m, the investor owns 16.7%, and the founders keep 83.3%. Same headline number, a 3.3% swing in ownership, and on a R300m exit a difference of roughly R10m. Establish which one you are discussing in the first conversation, not the term sheet.

The option pool, and where it is taken from

Investors normally require an employee option pool — shares reserved for future hires. Reasonable in itself, and the location of one of the most consequential negotiations in a round.

The question is whether the pool is created before or after the investment. A pool carved out of the pre-money valuation dilutes only the existing shareholders. Created post-money, it dilutes everyone including the new investor.

Continuing the example: R40m pre-money, R10m raised, and a 10% pool required. Taken pre-money, the founders absorb the whole pool and end at roughly 70% rather than 80%, while the investor still holds 20%. Taken post-money, the dilution is shared. That single structural choice is frequently worth more than several million on the valuation, and it is almost never the thing under discussion.

Dilution across several rounds

Founders often model one round. The picture that matters is cumulative.

A founding team starting at 100% and giving up 20% at seed holds 80%. A Series A at 20% takes them to 64%. A Series B at 15% takes them to about 54%. Add option pools along the way and a team that has raised three ordinary rounds may hold somewhere near 45–50% of a business they founded outright.

That is a normal outcome, not a warning. Half of a company worth R500m is worth vastly more than all of a company worth R20m. The failure is not dilution — it is dilution that buys nothing, which is what happens when a round is raised too small, forcing another raise from a weaker position within a year.

Why percentage is the wrong number to watch

Two terms can matter more than ownership share at the moment of sale.

Liquidation preference determines who is paid first. A 1x non-participating preference means the investor takes the greater of their money back or their percentage share. A 2x participating preference means they take twice their money back and then their percentage of what remains. On a modest exit, an aggressive preference can leave common shareholders with very little regardless of the percentage on the cap table.

Anti-dilution provisions adjust an investor's shareholding if a later round is raised at a lower valuation. Full-ratchet versions can be severe, re-pricing the earlier investment as though it had been made at the lower figure and shifting ownership sharply away from founders in precisely the situation where they are weakest.

Both are defined in equity terms defined. The habit worth building is simple: separate terms that set price from terms that set control and terms that set queue position, and negotiate all three.

Convertibles, and dilution that arrives later

Convertible instruments — convertible loans and SAFEs — delay the valuation conversation rather than removing it. Money comes in now; the shares are issued at the next priced round, usually at a discount to it.

The dilution is real but invisible until it lands, which is why founders regularly under-model it. A business that has taken three convertible notes at successive discounts can find, at its first priced round, that a materially larger share of the company converts than expected — and it converts before the new investor's money, so the founders absorb it.

Two terms govern the outcome. The discount, typically 15–25%, sets how much cheaper the converting investor's shares are than the new round's. The valuation cap sets a ceiling on the valuation at which conversion occurs, and on a strong round the cap rather than the discount usually determines the result — sometimes dramatically. Model the conversion at the valuation you hope to achieve, not the one you fear, because a cap bites hardest precisely when things go well.

Keeping the cap table clean

An untidy cap table costs real money at diligence. The usual culprits are informal promises of equity never documented, loans from shareholders with unclear conversion terms, options granted without a scheme, and inherited shareholders nobody can locate.

Every one of these is far cheaper to fix before a raise than during one. A messy cap table does not usually kill a transaction; it delays it, and delay is the thing that erodes a founder's negotiating position more reliably than any term sheet.