Dilution is the fall in an existing shareholder's ownership percentage that occurs when a company issues new shares — for example in a funding round, an ESOP pool top-up, or a bonus issue to others. If you owned 1% and the company doubles its share count without you buying more, your stake roughly halves to 0.5%.
Why it matters to you
Dilution is a normal cost of a growing private company raising capital, but it directly affects the value of your unlisted holding. Crucially, dilution is not always bad: if new money raised at a higher valuation grows the pie, your smaller slice can still be worth more. Pre-emptive rights are how big investors defend against it.
Example: A holder's stake fell from 2% to 1.4% after a new round, yet the company's valuation tripled — so their holding's rupee value rose despite the dilution.