Dilution and cap table in later rounds

Every financing round brings fresh capital into the company, but it also changes the balance among those who own it. Dilution is the natural price of growth: issuing new shares to bring investors in reduces the percentage of each existing shareholder. It is not in itself a problem — better to own a smaller slice of a much bigger pie — but it must be understood and managed from the very first round, because mistakes on the cap table are paid for at every subsequent round.

What the cap table is

The cap table (capitalisation table) is the register of who owns what: founders, employees with options, investors, with their respective percentages on a fully diluted basis. In a Swiss AG it is reflected in the share capital structure and in any convertible instruments in circulation. A clean, up-to-date cap table is the first document a serious investor asks for: disorder here signals disorder everywhere.

How dilution arises

When an investor comes in, the company issues new shares. The capital widens and each existing share represents a smaller portion of the total. Two concepts underpin the calculation:

• Pre-money valuation: how much the company is worth before the capital injection.
• Post-money valuation: pre-money plus the new investment.

The percentage the investor obtains is investment divided by post-money. If a company is worth CHF 4 million pre-money and raises CHF 1 million, the post-money is CHF 5 million and the investor takes 20%. All previous shareholders are diluted proportionally by 20%.

The option pool and its trap

Before a round, investors almost always ask to create or expand an option pool for future key employees, often 10-15% of the capital. The critical point is when it is created: if the pool is set up before the increase (in the pre-money), the dilution falls entirely on the founders and not on the new investor. This is the so-called option pool shuffle, one of the most underrated terms in valuation negotiation.

Why later rounds matter

Dilution is not assessed by looking at a single round, but at the complete trajectory through to the exit. A founder who starts with 100% may find themselves, after seed, Series A and Series B, with a much smaller fractional stake. Some levers limit the erosion:

• Pro-rata right: the ability for existing shareholders to participate in future rounds to maintain their percentage. In the Swiss AG it connects to the shareholders’ subscription right.
• Sizing the rounds correctly: raising too much capital too early, at a low valuation, costs precious shares.
• Convertible instruments (convertible loan, SAFE-like): they defer the pricing but must be tracked, because they convert and dilute at the next round.

Anti-dilution clauses

Investors protect themselves from down rounds — rounds at a valuation lower than the previous one — with anti-dilution clauses. The two main variants:

• Full ratchet: very aggressive, it reprices the investor’s shares as if they had invested at the lowest price of the new round.
• Weighted average: more balanced and widespread, it corrects the price taking into account how many shares are issued and at what price.

For founders the difference is enormous: a full ratchet in a down round can cause severe dilution. It must be negotiated carefully as early as the first term sheet.

What to keep under control

• Keep a fully diluted cap table always up to date, including options and convertibles.
• Simulate dilution over several rounds before signing, not just on the current one.
• Clarify whether the option pool enters the pre or post-money.
• Read the anti-dilution and liquidation preference clauses together: they define who really earns at the exit.
• Coordinate everything with the articles of association and the shareholders’ agreement of the AG.

In short

Dilution is inevitable and healthy, if governed. What distinguishes a prepared founder is the ability to read the cap table in perspective, negotiate the position of the option pool and understand how investor protection clauses interact over time. The percentage matters less than the absolute value of your stake at exit.

Do you want to face the next round with a solid cap table and terms negotiated in your favour? SIH ONE’s ventures division supports founders in structuring rounds and managing dilution.