How dilution works
Every priced round issues new shares, so everyone who already holds shares owns a smaller slice of a company that is, ideally, worth more. If investors put in $2 million at a $10 million pre-money, they own $2 million ÷ $12 million = 16.7% after the round, and every existing holder is diluted by that same 16.7%: a founder at 80% falls to 66.7%.
Dilution compounds. Founders who sell 10%, 17% and 20% across three rounds keep 0.9 × 0.83 × 0.8 ≈ 60% of whatever they held at the start, before counting the option pool.
The option-pool shuffle
Most term sheets require the unissued option pool to reach a target size, often 10–15% of the post-money, and require the new options to be created before the round, inside the pre-money valuation. The new investors are then not diluted by the pool at all; existing holders absorb it. The calculator solves for the exact pool increase: with k = post-money ÷ pre-money and a target t, the new options needed are (t × k × shares before − existing pool) ÷ (1 − t × k). Set “Pool after” to 0% on a round to see how much the top-up alone costs the founders.
A larger pool at the same pre-money is a lower price per share in disguise. When you compare term sheets, compare the price per share, not just the headline valuation.
What this leaves out
SAFEs and notes converting at the first priced round add their own dilution. Model those with the SAFE calculator. Down rounds can trigger anti-dilution adjustments that shift more shares to earlier investors; see full ratchet vs. weighted average. How the founders’ slice is split between them is a separate decision, covered in equity splits and vesting.