A growing number of young startups are racing to scale up by giving up large chunks of equity early. Founders of at least 11 early-stage ventures have diluted more than 40% ownership in their recent fundraises, according to data from TheKredible. While this injection of capital has pushed up valuations and validated the promise of the ecosystem, analysts said that the consequences of such early dilution could prove damaging over time.
The cause of this trend lies in the pressure to grow fast and capture market share before competitors close in. Founders, confronted with uncertain later-stage fundraising markets, are increasingly opting for firepower today over ownership tomorrow. The effect, according to analysts, could be that they may end up with too little stake in their own ventures when the real battles for scale and sustainability unfold.
Founders caution against sacrificing ownership for speeed and scale
“Many founders choose speed and scale even at the cost of ownership, believing they can make up later,” Reihem Roy, partner at Omnivore, told FE. “But if unchecked, this can disincentivise entrepreneurs in the long run. Healthy ecosystems balance ambition with discipline, ensuring founders retain enough ownership to stay motivated and make long-term decisions,” he added.
The trade-off is already visible in cases such as stock-trading platform Sahi, fintech player DPDzero, and home services startup Pronto. All three founders diluted over 40% of their stakes across two rounds. Sahi, for instance, raised $10.5 million in June at a $60.5-million valuation from Accel and Elevation Capital, but its co-founders Dale Vaz and Manish Jain now jointly hold only 47.17%. Similarly, semiconductor startup Netrasemi parted with more than 40% equity by Series A, though its valuation shot up 6.6 times to $74 million after raising $12.5 million.
This jump in valuation is precisely why some founders justify the move. According to them, higher visibility, quicker access to markets, and backing from well-connected investors often outweigh the personal cost of a thinner equity. A founder who requested anonymity said, “It’s not always a bad thing. New ideas often need strong mentorship, and if giving up significant equity brings in the right people, it can accelerate growth. In a way, it also signals investor confidence.”
But the effect of such early dilution may be felt more acutely when the company matures. According to legal experts, heavy dilution can erode a founder’s ability to steer their company at crucial junctures. “Excessive early dilution can limit a founder’s influence and control when critical decisions need to be made at later stages,” Jay Gandhi, partner at Shardul Amarchand Mangaldas & Co, said. “It may also make subsequent rounds harder to structure, since investors want to see founders meaningfully invested in the company,” he added.
Sandeep Murthy, managing partner at Lightbox, described early-stage dilution as “more art than science”. It often comes down to the demand-supply equation. If a company is seen as highly promising, founders can raise money with less dilution. But in an environment marked by macroeconomic uncertainty, investors tend to demand larger stakes for the risks they assume. This again tips the balance against founders.
Analysts say peer pressure drives excessive diution
Peer pressure also plays a role. If one startup raises $15 million by giving away 40%, others in the same space feel compelled to match that level, even when it may not suit their needs. Some founders cite examples of highly diluted peers who still built enduring businesses, pointing that the outcome validates the trade-off. But according to analysts, such outliers create distorted benchmarks.
The long-term impact of shrinking founder ownership can be serious. With less skin in the game, founders may lose bargaining power with boards, face pressure for early exits, or struggle to allocate sufficient stock options to retain talent. “Low ownership raises red flags for future investors. If a founder isn’t meaningfully invested, is the incentive still there?” asked Roy. “Over time, heavy dilution can hurt morale, limit flexibility in structuring future rounds, and complicate ESOP (employee stock ownership plan) allocations.”
As an alternative, analysts recommend tapping non-dilutive sources like grants or revenue-based financing, or at least mapping out ownership across future rounds before signing term sheets. “Startups should raise capital with intent, not just ambition,” Roy said. “Above all, they should not let funding headlines overshadow sustainable business building.”