Dilution
This schedule will help you to understand the impact of dilution. Please review the "FreeResources PrePostMoneyValuation.xls"
When a company needs to raise capital, the key question is how much is the company worth ?
A round of financig will indicate the price at which X % of ownership is sold/worth
Imagine a shareholder "P" owns : 3%
After a negotiation period, an investor is offering : 1,000,000 for 20% of the company
Which means that 100% of the company is worth 5,000,000
In other words, this is the company's PostMoney Valuation
#Shares:
The implied PreMoney Valuation was 4,000,000 Number of Shares before funding 200,000 100%
Shareholder "P"'s shares were worth 120,000 6,000 3%
And the rest of shareholders' shares were worth 3,880,000 194,000 97%
The PostMoney Valuation is now 5,000,000 #Shares: 250,000 100%
The new investor , as we now 1,000,000 Number of Shares after funding 50,000 20%
The initial % of 3% ..is now.. 2% 120,000 6,000 2%
The initial % of 97% ..is now.. 78% 3,880,000 194,000 78%