Dilution happens when a company creates and issues new shares. This often occurs when a startup raises capital, grants new ESOPs, or expands its option pool.
What is dilution?
You can still own the same number of options after dilution, but those options represent a smaller percentage of the total company. For example, owning 1,000 shares out of 100,000 is different from owning 1,000 shares out of 200,000.
Does dilution always reduce value?
Not necessarily. A smaller percentage of a much more valuable company can be worth more than a larger percentage of a smaller company. Funding can help a company hire, build products, expand, and grow.
Simple example
Owning 1% of a ₹10 crore company is worth ₹10 lakh. Owning 0.5% of a ₹100 crore company is worth ₹50 lakh.