The most expensive decision that feels small

A dilution decision made at growth stage rarely feels like a big one at the time. A founder gives up a slice of the company in exchange for capital that is needed now, the round closes, and the business gets back to work. The percentage on the term sheet looks like a reasonable price for the fuel.

The bill arrives years later, and it is almost always larger than anyone modelled. The reason is simple and easy to miss in the moment. The equity you give up does not cost you what the company is worth today. It costs you what your share of the company would have been worth at exit. Ownership compounds in the same direction as enterprise value, and the term sheet never shows you that part.

This piece walks through the math with real numbers, so the decision can be made with a model rather than a feeling.

The basic calculation

Take a founder who owns 60 percent of a software business at growth stage. The company needs capital to fund its next phase, and an equity investor offers a round at a post-money valuation of 30 million euros, in exchange for 20 percent of the company. That values the round at roughly six million euros of new capital, a realistic size for a growth-stage SaaS company at this valuation.

That 20 percent is not 20 percent of the company’s value today. It is 20 percent of the value the company is worth at exit. Suppose the business grows well over the following years and is eventually acquired for 300 million euros, a tenfold increase from the round’s valuation and a realistic outcome for a company that keeps compounding revenue at a healthy multiple. The 20 percent given up in that round is worth 60 million euros of exit proceeds. The founder’s personal share of that dilution cost, at 60 percent ownership, is 36 million euros.

The company raised six million euros in that round. The ownership handed over to secure it cost 36 million euros at exit, six times what was raised. That is the gap between how a dilution decision feels and what it actually costs. It felt like a fair price for growth capital at the time. It became one of the largest line items of the founder’s financial life.

Why the number is usually understated

Most founders who do run the math still understate it, for three reasons.

The first is stacking. Dilution is rarely a single event. A round at growth stage is often followed by another, and each new round dilutes the shares issued in the previous one. Two 20 percent rounds do not cost 40 percent of the company. The percentage compounds rather than adding up, which on its own is not the founder’s main problem. The real acceleration happens in value, not in ownership percentage: because later rounds tend to happen at higher valuations, a smaller percentage given up later can cost more in absolute terms than a larger percentage given up earlier.

The second is timing. The earlier a company raises equity, the lower its valuation, and the more ownership it must give up for the same amount of cash. Capital raised at a lower valuation is the most expensive capital a founder will ever take, because each euro costs more ownership than it would later.

The third is the counterfactual. The real question is never simply whether the equity was worth it. It is whether the same growth could have been funded another way, leaving the ownership intact. If it could, the entire value of that retained ownership at exit is the true cost of choosing equity.

What stacking looks like with numbers

Return to the founder who owns 60 percent, and to the first round from the basic calculation above, a 30 million euro post-money valuation in exchange for 20 percent. A couple of years later, having grown well, the company raises a second round, this time at a valuation of 90 million euros, again diluting existing shareholders by 20 percent. It is tempting to think the founder has given up 40 percentage points across the two rounds, leaving 20 percent. The math does not work that way.

After the first round, the founder’s 60 percent becomes 48 percent, because the whole cap table is diluted by a fifth. After the second round, that 48 percent is diluted by another fifth, leaving roughly 38 percent. In percentage terms the founder actually keeps more than naive subtraction implies, not less, 38 percent rather than the 20 percent that subtracting 40 points from 60 would suggest, because each round dilutes what is left rather than the original whole.

The euro cost tells a different story, and it is the one that matters more. The first round gave up 12 percentage points against a 30 million euro valuation. The second gave up a smaller slice, 9.6 percentage points, but against a company now valued at 90 million euros, three times as large. The percentage given up shrank. The value it represented did not shrink in the same proportion, because it was measured against a much bigger number. This is the mechanism behind the stacking effect described earlier: later rounds typically cost fewer percentage points but are priced against a larger business, so the value given away does not fall as fast as the percentage does and can climb even as the percentage keeps shrinking.

At an eventual exit of 300 million euros, the first round’s 12 points cost 36 million euros, and the second round’s 9.6 points cost a further 28.8 million, a combined 64.8 million euros against owning 60 percent outright. Some of that dilution funded genuine value creation and was worth it. The question worth asking at each round is how much of it funded growth the company could have financed another way, because that portion is pure cost, with nothing bought that could not have been bought more cheaply.

Comparing equity against non-dilutive capital

Set the two options against each other honestly, because equity has a real place and the point is not to pretend otherwise.

Non-dilutive capital has a defined, visible cost. With revenue-based financing, for example, the company repays the amount funded plus an agreed multiple, commonly between 1.4 and 2 times, as a share of revenue over time. That cost is bounded and known in advance. Once the cap is reached, the arrangement ends and the ownership was never touched.

Equity has an open-ended cost that is invisible at signing and only becomes clear at exit. If the company does well, the ownership you sold becomes the most expensive capital you ever raised. If it does poorly, the equity investor shared the downside with you, which is the genuine benefit equity provides.

The comparison, then, is straightforward to frame even if the answer varies by company. If you believe in the trajectory of your business and you have the revenue to service non-dilutive repayments, the fixed and bounded cost of that capital is usually far smaller than the open-ended cost of the ownership you would otherwise give away. If the future is genuinely uncertain and you want an investor to carry part of the risk, equity earns its price. The mistake is not choosing equity. The mistake is choosing it without ever running the ten-year number.

Ownership is not only about money

There is a second dimension the ten-year number does not capture. Equity does not just cost a share of the exit. It also brings investors with rights, board seats and a say in major decisions, and it introduces timelines and exit expectations that may not match the founder’s own. For some companies that governance is welcome, and the investors add real value. For others it becomes a source of misalignment, where the pressure to engineer a particular outcome on a particular schedule pulls against what would be best for the business. Non-dilutive capital carries none of that. The financier is repaid from revenue and has no claim on how the company is run or when it exits. When you weigh the cost of an equity round, the ownership percentage is only part of it. Control and freedom of action belong in the same calculation.

A simple rule before you sign

Before accepting any dilutive round, model the same figure the term sheet leaves out. Take the percentage you would give up, multiply it by a realistic exit value, and multiply again by your own ownership stake. That is roughly what the decision costs you personally, in the outcome you are working toward.

Then ask whether the amount of capital you actually need could be raised without giving that up. For a capital-efficient software business with recurring revenue, the answer is more often yes than founders expect. What you keep compounds exactly like what you built. That is the line the term sheet never mentions.

At Round2 Capital, our starting point is non-dilutive capital: we fund growth-stage software companies without taking equity, allowing founders to retain their ownership. Where revenue-based financing is not the right fit, we can also provide equity, typically as a minority stake and often as a later stage to help prepare a company for its next exit. We are happy to help a founder model the trade-off objectively and choose the financing approach that best fits their situation.