One of my clients is raising a seed round of financing. Of course, she’s a smart cookie, and bootstrapped her way to some impressive results before raising the money. In case you go about something like this, I’ll show you how the ownership structure gets impacted.
First, she starts with some (arbitrary) number of shares – or units if it’s an LLC.
Then she issued some more units to key employees and advisors.
After that, she raised the round. The price per share is simply the pre-money valuation divided by number of shares before the round ($900,000 pre-money valuation / 10,640 shares = $85.59 per share). The investors put in $250,000, so the company issues an additional 2,956 units to them ($250,000/$85.59 = 2,956).
Everytime the company issues more shares, the previous owners are left with a smaller fraction of the total shares (barring anti-dilution provisions). They are effectively “diluted”. However, as long as the valuations keep rising, they’ll own a smaller piece of a bigger pie, so the value of their ownership will increase.