You just got an offer from a Series A startup. The letter says you’ll receive stock options representing 0.5% of the company on a fully diluted basis. The company is valued at $50 million, so you think your equity is worth $250,000. You run the math: if the company exits at $200 million, that’s a 4x return, which means your stake should be worth $1 million.
Except it won’t be.
By the time the company actually exits, your 0.5% will have been diluted through two more funding rounds and at least one option pool refresh. After the Series B and C investors exercise their 1.5x liquidation preferences, your shares are worth closer to $300,000 pre-tax. Not nothing, but nowhere near the number you calculated when you signed.
The percentage you’re quoted in your offer letter is the highest percentage you will ever own. It only goes down from there. Most people don’t realize this until it’s too late—after they’ve already joined and watched their equity shrink with each new round.
Ready to Get Started?
Contact us today for a free consultation.
Why the Number in Your Offer Letter Is Already Wrong
When a startup tells you that you’ll own 0.5% of the company on a “fully diluted basis,” they’re giving you a snapshot of today’s cap table. That number includes all issued shares, all outstanding stock options, and the full option pool reserve—even the options that haven’t been granted yet.
What it doesn’t include: the next funding round. Or the round after that. Or the option pool refresh the company will negotiate before raising Series B. Or the convertible notes that haven’t converted yet. Or the SAFEs sitting on the cap table waiting to turn into equity.
Your 0.5% is calculated using the total number of shares that exist right now, plus the shares reserved for future employees in the option pool. But it has nothing to do with the total number of shares that will exist when the company exits.
That’s the part most people miss. The denominator keeps growing, and your numerator stays the same unless you negotiate a refresh grant.
The Dilution You Can See Coming
Every time a startup raises a new funding round, it issues new shares to investors. Those new shares dilute everyone who owned stock before the round. The typical dilution per round is 15% to 25%, depending on how much the company raises and at what valuation.
Hypothetical example:
The company raises a $20 million Series B at a $100 million pre-money valuation. Investors get $20 million worth of shares, which represents 16.7% of the post-money company ($20M / $120M). Everyone else’s ownership percentage drops by that same 16.7%. Your 0.5% becomes 0.42%.
That’s the dilution that happens to everyone—founders, early employees, and previous investors all get diluted proportionally.
But there’s a second type of dilution that doesn’t hit everyone equally: option pool increases.
Most companies refresh the option pool before raising a new round. Investors want to make sure there’s enough equity reserved to hire the team that will get the company to the next milestone. A typical refresh adds 10% to 20% to the option pool.
Here’s the thing: that new pool comes out of the common stockholders’ share, not the investors’ preferred stock. So when the company increases the option pool by 15%, that dilution hits you and the founders, but not the Series A investors who just wrote the check.
This is called the “option pool shuffle,” and it’s been standard practice since the mid-2000s. Investors negotiate to increase the pool before their money goes in, which means the dilution happens on the pre-money valuation. The math works out so that the new shares dilute the existing common stock, not the new preferred shares.
If you don’t get a refresh grant when this happens, you just lost 12% to 15% of your ownership permanently.
Liquidation Preferences and Why Your Percentage Isn’t Your Percentage of the Exit
Even if you know your exact ownership percentage at exit, that still doesn’t tell you what you’ll actually get paid.
That’s because investors have liquidation preferences, which means they get paid first in an exit before any common stockholders see a dollar.
A 1x liquidation preference means investors get their money back before the rest of the proceeds are distributed. A 1.5x preference means they get 1.5 times their investment back first. A 2x preference means they get double.
Hypothetical example:
The company raises $40 million total across Series A and B. Investors negotiated a 1.5x liquidation preference. The company exits for $100 million. Before anyone else gets paid, $60 million goes to the preferred shareholders. The remaining $40 million gets split among all shareholders pro rata based on ownership percentage. If you own 0.5% at exit, you get 0.5% of that $40 million, which is $200,000—not 0.5% of $100 million.
In a big exit, liquidation preferences don’t matter much. If the company exits for $500 million, the $60 million preference is a rounding error. Investors take their preference, and there’s still $440 million left to split. Your 0.5% is worth $2.2 million.
But in a modest exit—anything less than 3x to 4x the total capital raised—the preference can cut your payout in half or more.
There’s also something called participating preferred, which is more common in down markets and later-stage rounds. With participating preferred, investors get their liquidation preference and then participate pro rata in whatever’s left. They get paid twice.
If investors hold 40% of the company and have a 1x participating preference on $40 million, they take $40 million off the top, and then they get 40% of the remainder. In a $100 million exit, that’s $40 million plus $24 million (40% of the remaining $60 million). Common stockholders split what’s left, which is $36 million instead of $60 million. Your 0.5% just became worth $180,000 instead of $300,000.
Most Series A deals today use non-participating preferred with a 1x preference. But Series B and later rounds, especially in tougher funding environments, often come with 1.5x preferences or participating terms. You won’t know unless you ask.
The Question You Should Actually Be Asking
The question isn’t “Is 0.5% good?”
The question is: “What will my percentage be at exit after all the dilution I can reasonably expect, and what happens to that percentage after liquidation preferences?”
To answer that, you need to know:
How many more funding rounds does the company expect to raise before an exit?
How much dilution does each round typically cause?
What’s the current size of the option pool, and how often does it get refreshed?
What liquidation preferences are already on the cap table, and what terms will future investors likely demand?
Most offer letters don’t include this information. You have to ask for it.
You can also ask to see a pro forma cap table that models out the next two rounds of funding. Some companies will show you this. Some won’t. But the fact that you asked signals that you understand how equity actually works, which changes the conversation.
The other thing to understand: the number of shares you’re granted is meaningless without knowing the total shares outstanding. Some companies will quote you “100,000 shares” instead of a percentage. That’s usually a red flag. It either means the cap table is messy, or they don’t want you doing the math.
Always convert shares to a percentage. And always ask what that percentage will look like after the next round.
What Dilution Actually Looks Like Over Multiple Rounds
Here’s what happens to a 0.5% fully diluted equity grant over three funding rounds, assuming typical dilution and one option pool refresh:
At offer (Series A): You own 0.5% fully diluted. The company is valued at $50 million post-money. On paper, your equity is worth $250,000.
After Series B: The company raises $20 million at a $100 million pre-money valuation. That’s 16.7% dilution to existing shareholders. The company also refreshes the option pool by 15%, which dilutes common stock by another 12%. Your 0.5% becomes approximately 0.38%.
After Series C: The company raises $50 million at a $250 million pre-money valuation. That’s 16.7% dilution again. A few convertible notes from earlier convert into equity, adding another 3% dilution. Your 0.38% becomes approximately 0.28%.
At exit: The company exits for $200 million. Investors have a 1.5x liquidation preference on $60 million invested, so $90 million comes off the top. The remaining $110 million is split pro rata. Your 0.28% is worth $308,000 pre-tax.
Same equity grant. Different outcome than the $1 million you calculated when you signed.
These numbers are illustrative and based on typical dilution ranges of 15% to 25% per round, but the pattern holds across most venture-backed startups. Your percentage shrinks with every round, and liquidation preferences carve out the first dollars of any exit.
Bottom Line
It’s worth asking the company how many more funding rounds they expect to raise before an exit and what the typical dilution has been in past rounds.
A good starting point is requesting a cap table summary or pro forma that shows what your ownership percentage would look like after the next round, including any planned option pool refresh.
It’s worth checking what liquidation preferences are already on the cap table and whether any investors have participating preferred rights.
If the company has raised on SAFEs or convertible notes that haven’t converted yet, it’s worth asking how much additional dilution will happen when those convert in the next priced round.
It’s worth looking at whether the company offers refresh grants to early employees after dilution, and if so, what the criteria are for getting one.
Have you ever been surprised by how much your equity percentage changed after a funding round? Or discovered that liquidation preferences cut your exit payout more than you expected? Drop a comment below.
Disclaimer: This is educational content from Silly Money, not tax, legal, or investment advice. Taxes are complicated and your situation is unique. Talk to a qualified professional before making decisions based on anything you read here.
