If a venture capitalist currently has 30% equity and then in a second round of financing they receive a further 10%, why is the new total holding not just 40%?

VC Investing

Let's assume you start with 30% ownership of a company and now you need to raise extra finance. In return for this extra finance you must give away 10% of the shares.  Let’s assume there are originally 100 shares and so initially we had 30. We now give away 10% ie 10 shares, which are spread between all shareholders. Since you have 30% then you must give away 30% of this 10, ie 3 shares. This leaves you with 27 shares.  Mathematically this is 03 x 0.9 ( ie reducing the holding by 10%).

Let’s now assume that you are actually a VC investor and the firm is asking you for the money.  The same math apply.  Since you are an existing shareholder you will also need to contribute towards these new shares.  But now of course these 10 share will come back to you hence your new holding will be 0.3 x 0.9 = 27 and then we add the extra 10 giving a total of 37 shares (or 37%)