Dilution (equity)
Reduction in existing members' percentage ownership when new equity is issued.
Definition
Dilution occurs when an LLC issues new membership interests to new members. Existing members' percentage ownership decreases proportionally. Dilution is mathematically inevitable when new equity is issued; the question is whether the LLC's increased value (from the new capital or new contributor) compensates for the percentage reduction.
Context
Founder dilution is a recurring concern in venture-track companies; bootstrap LLCs typically face less dilution because they raise less external equity.
Example
A founder owns 100% of a Delaware LLC. The LLC raises $500K from an investor for 20% equity. The founder is diluted to 80%; total LLC value is now $2.5M.
Common pitfalls
- Dilution math compounds across multiple funding rounds.
- Anti-dilution provisions in Operating Agreements can preserve ownership at the cost of new investor terms.