Sixty-nine percent of co-founders in digital health IPOs owned less than five percent of their company when they went public. Forty-four percent had no reported equity at all. The median individual founder ownership at IPO was just two percent.
Those numbers should make every founder sit up straight. But here is the caveat. Those are digital health companies. They eat cash for breakfast. A lean B2B SaaS startup with good unit economics will do much better. Still, the trend is real. Founder ownership gets eaten alive by funding rounds.
The question is not whether you will get diluted. You will. The question is how much you can protect, and whether what is left at the end is worth the years you gave.
This guide walks through the math in plain English. No complex spreadsheets. Just clear numbers, real examples from Careem and Daraz, and the legal stuff you actually need to know. From the option pool shuffle to anti-dilution clauses, here is what founders should understand before they sign their first term sheet.
Sixty-nine percent of co-founders in digital health IPOs owned less than five percent of their company when they went public. Forty-four percent had no reported equity at all. The median individual founder ownership at IPO was just two percent. Those numbers come from looking at thirty-four digital health companies that went public — Smile Direct Club, Doximity, Hinge, Omada — all public records. Before you panic, here is the caveat. Those are digital health companies. They eat cash for breakfast, lunch, and dinner. They need massive rounds before they make a single dollar. A lean B2B SaaS startup with good unit economics will do much better. But the trend is still real. Founder ownership gets eaten alive by funding rounds. The question is not whether you will get diluted. You will. The question is how much you can protect, and whether what is left at the end is worth the years you gave.
You and your co-founder start a company. You split equity fifty-fifty. No outside money. No employees with equity yet. Your cap table is simple — Founder A at 50 percent, Founder B at 50 percent. This is day one. It will never look this clean again.
You raise a seed round. Let us say one million dollars at a five million pre-money valuation. Pre-money is five million. Post-money is six million. The investor gets one-sixth of the company, which is about 16.6 percent. But here is where first-time founders get tripped up. They forget about the option pool. Investors almost always make you set aside shares for employees before they invest, and they take that pool out of the pre-money valuation. That means you eat the dilution, not them. After a typical seed round, Founder A ends up with 35 percent, Founder B gets 35 percent, the seed investor takes 20 percent, early employees get about 7 percent, and a small option pool of about 3 percent remains for future hires. You went from 50 percent each to 35 percent each — a 30 percent dilution in just one round, and you have not even raised a Series A yet.
Now you raise your Series A. Let us say eight million dollars at a forty million post-money valuation. The new investor will buy enough shares to own 20 percent of the company, and if nothing else changed, each existing shareholder would simply lose 20 percent of their ownership — founders would go from 35 percent to 28 percent, the seed investor from 20 percent to 16 percent. But two things almost always happen at Series A that make the dilution worse. First, you need a bigger option pool. You are about to hire aggressively and your existing pool of 3 percent is nowhere near enough, so the Series A investor will make you increase it to 10 percent — and that new pool comes out of the pre-money valuation, meaning you pay for it entirely. Second, your seed investor may have pro-rata rights, the contractual right to invest more money in this round to keep their ownership percentage from shrinking. If they exercise it, the company issues even more new shares, which dilutes you further. After all of that, Founder A drops from 35 percent to about 22.7 percent, Founder B does the same, the seed investor stays at 20 percent because they used their pro-rata rights, the Series A investor gets their 20 percent, early employees dilute down to about 4.5 percent, and the option pool jumps to 10 percent. You went from 35 percent to 22.7 percent — another 35 percent dilution of what you had. The seed investor protected themselves completely because they had the contractual right and the cash to exercise it. You do not have millions lying around to buy more shares, so you just take the hit. This is not an extreme example. Twenty-five to thirty percent total dilution in a Series A round is normal.
The math compounds from there. After seed you own 35 percent. After Series A you own about 22.7 percent. After Series B, diluted by roughly another 20 percent, you drop to about 18 percent. After Series C, another 15 to 20 percent dilution takes you down to about 14 or 15 percent. By the time you are at Series C or D, a non-founder CEO might own three to five percent. A founder who started with 50 percent might own ten to fifteen percent. And that is before anything goes wrong, like a down round.
Careem is the biggest startup exit the Middle East has ever seen. Uber bought it for 3.1 billion dollars in 2019 and the founders walked away with life-changing money. STC Ventures put one million dollars into Careem's seed round in 2013 and owned 6.4 percent at the time of the Uber acquisition — a return of about two hundred million dollars, a 100x outcome. Think about that. An early institutional investor owned only 6.4 percent at exit. Mudassir Sheikha and Magnus Olsson had raised multiple rounds from investors including Kingdom Holding and Daimler, and by the time of the 3.1 billion dollar exit, the founders likely owned somewhere between ten and twenty percent combined — maybe less. Still a massive outcome, but a far cry from the 50 percent each they started with. Daraz tells a different story. The e-commerce platform was founded in Pakistan in 2012, raised about fifty-six million dollars over time, and was acquired by Alibaba in 2018. After the acquisition, the founder was an employee of Alibaba — he had a job, not a kingdom. His equity turned into cash or Alibaba shares, and then he worked for the parent company before eventually being replaced. That is the trade-off. You sell control for liquidity. Kingdom Holding invested in both Careem and Lyft, making almost 100 percent annual return on Careem and 53 percent on Lyft. That is what institutional investors do. They protect themselves. Founders do not have that luxury unless they negotiate for it.
There is a moment in every funding round that founders hate and investors love. The investor says: we love your company, we will invest at a ten million pre-money valuation, but before we do, we need you to increase your option pool from five percent to fifteen percent, and that new pool has to come out of the pre-money. What that really means is that the effective valuation for you and your existing shareholders is not ten million — it is ten million minus the value of those new options. In the Series A example earlier, the option pool expansion from three percent to ten percent cost the founders significantly. Total dilution ended up at twenty-nine percent for existing shareholders, not twenty percent, entirely because of that option pool refresh. Every time you raise money, the option pool gets refreshed. That is good for hiring but bad for your ownership. Negotiate the size of the pool and do not just accept the first number the investor throws at you.
Liquidation preference is the most important legal mechanism affecting your ownership. Preferred stockholders get paid before common stockholders in an exit. Standard terms are 1x non-participating — the investor gets their money back first, then everyone splits what is left. Aggressive terms are 2x or 3x participating, meaning the investor gets two or three times their money back first and then also gets their share of whatever remains. In a participating liquidation preference, common shareholders like you can end up with nothing even if the company sells for a decent amount. Anti-dilution provisions protect investors if you have to raise money at a lower valuation than before. Full ratchet is brutal — if an investor bought shares at ten dollars each and you later raise at five dollars, full ratchet resets the investor's price to five dollars, effectively doubling their shares and crushing your ownership. Weighted average is gentler, adjusting the price based on how much money you raise at the lower valuation with far less severe dilution. Never agree to full ratchet. It is a deal killer. Weighted average is standard and acceptable.
According to studies of venture-backed startups, founder ownership at IPO typically averages between fifteen and twenty percent, though averages hide extremes — some founders own thirty percent, some own one percent. The digital health data is worse: sixty-nine percent of co-founders owned under five percent at IPO, forty-four percent had no reported equity at all. Hinge Health was the exception, with founders collectively keeping nearly a quarter of the company at IPO by raising money on clean terms, keeping the cap table simple, and avoiding stacked preferences. The advice from lawyers who do this every day is simple: you do not protect your ownership at the IPO. You protect it starting with your very first term sheet.
You are not powerless. Limit the option pool size — every round investors will ask for ten to fifteen percent, push for eight, remind them the pool only needs to cover future hires for the next eighteen months, not five years. Ask for pro-rata rights for yourself so you can invest alongside investors in future rounds; you may not have the capital today, but you can sell a small portion of your shares to fund that future investment. Avoid participating liquidation preferences entirely and stick to 1x non-participating — if an investor asks for 2x participating, walk away, because that term can wipe you out completely. Never accept full ratchet, and if an investor insists on it, ask yourself why they are so worried about a down round. Bring your own lawyer — not the investor's lawyer, not a friend who does real estate, but a startup lawyer who has negotiated venture deals. The money you spend on legal fees before signing a term sheet is the best money you will ever spend.
Dilution is not theft. It is the price of building something that needs capital. The founders of Careem got diluted and are still very wealthy. The founders of Daraz got diluted and acquired and are fine. But there is a difference between healthy dilution and destructive dilution. Healthy dilution happens at fair valuations on clean terms. Destructive dilution happens when you raise too much too early, accept aggressive investor protections, or forget to model the option pool shuffle. The founders who end up with fifteen percent of a billion dollar company are better off than the founders who end up with fifty percent of a company that never raises another round and dies — ownership percentage only matters when you multiply it by the exit value. But that does not mean you should be passive. Every point of dilution you give up today is gone forever. There is no clawback. So negotiate, push back, bring a lawyer, and know your numbers before you walk into the room. The founders who protect their ownership are not the ones who say no to capital. They are the ones who say yes on their own terms.
