Raising investment gets treated, culturally, as a milestone — a sign a company has “made it,” something to announce, a line on a resume. None of that has anything to do with whether it’s actually the right decision for the person giving up part of their company to get it.
The right way to think about it is much simpler and much less emotional: taking investment means trading a percentage of the company for capital, on the bet that the capital makes the remaining, smaller percentage worth more than the whole company would have been worth without it. That’s the entire decision. Everything else — market conditions, what other founders are doing, whether a raise feels like validation — is noise around that one trade.
The Trade, Stated Plainly
Every fundraise does the same three things at once: it dilutes the founder’s ownership by some percentage, it hands the company capital, and it makes an implicit bet that the capital will increase the company’s value or its odds of succeeding by enough to make the smaller remaining slice worth more than the bigger slice would have been worth alone.
The question a founder actually needs to answer isn’t “do I need money” or “is this a good valuation.” It’s: does the expected value of my smaller, post-raise ownership stake exceed the expected value of my larger, pre-raise ownership stake? If yes, take the money. If no, the raise is destroying value for the founder even if it’s a “good deal” by every other conventional measure.
Building the Formula
Start with the ownership math, which is the easy part. If a founder gives up a dilution percentage d in a raise, their ownership after the round is:
Ownership After = Ownership Before × (1 − d)
That much is arithmetic. The part that actually requires judgment is what happens to the company’s expected value on each path — with the capital, and without it. This has two components that are easy to conflate but need to be judged separately:
Probability of success (P) — not every path reaches a valuable outcome at all. An unfunded company might run out of runway before it reaches profitability or the next real milestone. A funded company might have meaningfully better odds of getting there, simply because it can survive long enough to find out.
Value if successful (V) — separately from whether the path succeeds, how big is the outcome if it does. Capital might not just improve the odds — it might also let the company capture a bigger market, move faster than competitors, or reach a scale the unfunded path never could.
Multiplying these together gives the real expected value of each path — not just “will this work” or “how big could this get,” but both at once:
Expected Value = P × V
The Full Formula
Putting the pieces together, a founder should take the investment only if their expected value after dilution, on the funded path, exceeds their expected value on the unfunded, organic path:
P₁ × V₁ × (1 − d) > P₀ × V₀
Where:
- P₀ = probability the organic, unfunded path reaches a successful outcome
- V₀ = value of that outcome if it’s reached organically
- P₁ = probability the funded path reaches a successful outcome
- V₁ = value of that outcome if it’s reached with funding
- d = the dilution percentage given up in the round
Rearranged, this gives a cleaner way to read the decision — a required uplift the capital has to deliver, measured against a threshold set entirely by the dilution:
(P₁ × V₁) / (P₀ × V₀) > 1 / (1 − d)
The left side is the actual expected-value uplift the capital would need to produce — how much better the funded path is, in both odds and size, compared to going it alone. The right side is the bar that uplift has to clear, and it’s set purely by how much ownership is being given up. Give up 20% of the company (d = 0.2), and the funded path’s expected value needs to beat the organic path’s by more than 1.25x. Give up 40%, and the bar rises to needing more than 1.67x. The more dilution a round costs, the higher the bar the capital has to clear before it’s actually worth taking.
Worked Example
Figures below are illustrative, built to walk through the formula — not a real company’s numbers.
Organic path (no capital raised):
- Probability of reaching a successful outcome (P₀): 40% — a real, meaningful chance, but capital-constrained growth means a real chance of running out of runway first
- Value if successful (V₀): $20M
- Expected value: 0.40 × $20M = $8.0M
Funded path (raise at 20% dilution):
- Probability of reaching a successful outcome (P₁): 55% — capital removes the runway risk and buys time to find what’s working
- Value if successful (V₁): $50M — faster growth and more capital let the company capture a larger, harder-to-replicate market position
- Expected value before dilution: 0.55 × $50M = $27.5M
- Expected value after 20% dilution: $27.5M × (1 − 0.20) = $22.0M
Checking the formula:
Required uplift ratio = 1 / (1 − 0.20) = 1.25x
Actual uplift ratio = (0.55 × $50M) / (0.40 × $20M) = $27.5M / $8.0M ≈ 3.44x
3.44x clears the 1.25x bar comfortably. In this case, taking the investment is the right call — not because the valuation felt fair or the round was oversubscribed, but because the capital plausibly does enough, on both probability and size, to make the smaller remaining slice worth nearly three times what the whole company was worth without it.
Where This Formula Gets Abused
The formula is only as honest as the numbers going into it, and there are two specific ways founders talk themselves into a bad raise using exactly this logic.
Inflating V₁ without justifying it. It’s easy to assume capital will produce a much bigger outcome simply because more money is available to spend. The information-edge piece elsewhere on this site makes the same point from the investor’s side: an assumption needs a specific, nameable reason behind it, not just optimism. If V₁ is bigger than V₀ only because “we’ll have more money to grow with,” that’s not yet a justified number — it’s a hope wearing a formula’s clothes.
Understating P₀. The organic path’s probability of success is easy to lowball, especially under the pressure of a live raise, because a low P₀ makes almost any funded path look better by comparison. If the honest organic probability is actually 60%, not 40%, the bar the capital needs to clear rises substantially, and a raise that looked obviously correct might not clear it at all.
What the Formula Doesn’t Capture
Three real costs sit outside this math entirely, and a founder who only runs the formula is missing them.
Control. Dilution percentage doesn’t capture governance. Board seats, protective provisions, and liquidation preferences can cost a founder real decision-making power and downside protection that a pure ownership percentage doesn’t reflect. A round at 20% dilution with a board seat and a 2x liquidation preference is a meaningfully different trade than 20% dilution with neither.
Cost of capital comparison. Equity is close to the most expensive capital a company can raise, because it’s diluting a claim on all future value, not just charging interest on a loan. Before running this formula on an equity raise, it’s worth asking whether the same constraint — usually, not enough cash to survive to the next milestone — could be solved with debt, revenue-based financing, or simply slower, self-funded growth. The formula above answers “is this equity raise worth it,” not “is equity the only option.”
What taking the money commits you to. The earlier piece in this series on VC strategy noted that a fund’s own math requires most of its portfolio to fail so a small number of outlier outcomes can carry the return. Taking that capital means the company is now expected, implicitly, to be one of the businesses capable of producing that kind of outcome — not a stable, profitable, moderate-growth business, even if that would have been a perfectly good outcome for the founder personally. The formula above measures expected value. It doesn’t measure whether the founder actually wants to run the kind of company that VC capital requires them to be building toward.
Explain It Like I’m Four
Imagine you have a whole pizza, and someone offers you a deal: give them one slice, and in exchange, they’ll help you make the whole pizza bigger.
If they can really make the pizza big enough, giving up one slice is a great trade — even though you now own fewer slices, each slice is so much bigger that your one remaining share is worth more food than the entire original pizza was.
But what if they can’t actually make the pizza that much bigger? Then you’ve just given away a slice of a pizza that was never going to grow much — and you end up with less food than if you’d just kept the whole original pizza to yourself.
So before agreeing, you have to ask two honest questions. First: how much bigger will the pizza actually get with their help — not how big they promise it’ll get, but how big it’s actually likely to get? And second: how sure am I that the pizza even survives long enough to get bigger at all, with or without their help?
If the answer to both questions adds up to “yes, my one remaining slice will end up bigger than the whole pizza I have now” — take the deal. If it doesn’t, keep the whole pizza, even if it’s smaller, because a bigger share of a small pizza can easily beat a smaller share of a pizza that never actually got as big as promised.
One sentence version: only give up a slice of your pizza if you’re honestly convinced your one remaining slice will end up bigger than the whole pizza would have been on its own.
What’s Next
This formula is really the founder-side mirror of the VC breadth and information-edge pieces elsewhere in this series — the investor is running the same expected-value math from the other side of the table, deciding whether the ownership they’re buying is worth the price. Worth a look together if you haven’t read those yet.
Have you actually run this math on your own raise, or just assumed the capital would make things bigger?
About Me
I'm Michael Philippou, co-founder of Big Love, a plant-based ice cream business in Santa Monica that I've been running with my wife Victoria for over ten years. Before ice cream, I was a lawyer. I write about the real, unpolished lessons of running a small business — no gurus, no hype, just what's actually worked and what hasn't. Watch more on YouTube (Real Business Real Lessons) or follow along on LinkedIn.
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