How venture capital works: capital choices and dilution

Venture funding is a financing relationship, not a certificate that a startup is successful. This guide helps Australian founders and learners explain a capital choice and the arithmetic behind dilution. It does not tell you to raise, set a price or recommend an investor.

Start here for capital choices. Use the VC firm research guide when your task is understanding a specific investor, and the valuation and option-pool guide for the separate pricing-denominator exercise.

What happens between a fund and a startup?

The SEC’s June 2024 private-funds explainer describes a fund as pooled investor capital managed for investment; venture funds commonly invest for equity. This is useful vocabulary, not a statement of Australian securities law. The fund’s investors and the startup receiving an investment are different parties.

In the primary-share example below, money goes into the company and the investor receives new shares. Existing holders own a smaller fraction of a larger share count. That fraction alone does not establish voting control, board rights, exit proceeds or the value of anyone’s holding. Those depend on the transaction and its documents.

Start with the milestone, then compare obligations

The Australian Government’s funding overview distinguishes borrowing from exchanging part ownership and identifies sources such as self-funding and grants. Use that distinction to prepare questions; this article does not adopt the overview’s broad deal-size, control or timing generalisations.

The official venture-pitch preparation guide asks applicants to explain the amount, use and intended outcome of capital. A useful first draft separates evidence from assumptions. An ambition to expand is not evidence that customers want the product.

One AI prototype, two different capital questions

Fictional discussion exercise: Mila and Ben each have a document-triage prototype. Neither has decided to raise. These are invented situations, not MLAI client results or financing recommendations.

• Mila: three local clients want different integrations. Her aim is a sustainable owner-operated service. She records the delivery hours, payment dates and support obligations before asking whether external capital would solve her actual constraint.
• Ben: wants to license one reusable product across many organisations. His pilot users have not agreed to pay. He records which functionality is genuinely shared, what customers did and which adoption assumption remains untested before discussing expansion funding.

The distinction is not “small business bad, venture startup good”. They have different objectives and missing evidence. For Mila, the useful question may be delivery capacity; for Ben, it may be repeatable demand. Neither the AI label nor a prototype answers the financing question.

Follow the shares through two fictional rounds

All money figures are AUD. Assume founders initially hold all 4,000 shares; each round issues only new primary shares with identical economic rights. No options, reserves, convertibles, fees, secondary sales, splits or additional investment by existing holders. Round names are labels, not evidence of market norms.

1. Round one: A$4m pre-money plus A$1m new cash gives A$5m post-money. Price per share is A$4m ÷ 4,000 = A$1,000. The new investor buys 1,000 shares; total shares become 5,000.
2. Round two: assume A$20m pre-money plus A$5m new cash. Price is A$20m ÷ 5,000 = A$4,000. The second investor buys 1,250 shares; total shares become 6,250.

Founders still have 4,000 shares. Their 80% after the first round is multiplied by the 80% retained by all existing holders after the second: 0.8 × 0.8 = 0.64. Subtracting 20 percentage points twice would incorrectly give 60%. The second dilution applies to the then-current ownership, not the original 100%.

Cooley’s post-money definition supplies the vocabulary; the numbers above are MLAI’s fictional teaching model, not that source’s transaction example. The file below includes the formula for changing assumptions and an answer key. It is not a live cap table or independently approved professional advice.

Download the two-round calculations and capital-fit record (.md). This editable text file contains the complete model, assumptions and discussion prompts—not an automated spreadsheet.

Separate interest, approval and cash received

A positive meeting is not a completed investment. Record the state you actually know: a conversation, requested evidence, a decision still pending, proposed terms, documentation or receipt of funds. Ask what remains before the next state; do not forecast cash using a generic fundraising timetable.

For example, “an investor asked for our pilot results” supports only a request for information. It does not support “the round is approved”. If you report progress to existing stakeholders, Vibe Raising can help prepare an update from your actual metrics and notes. It does not verify claims or secure investment.

Bring a capital-fit question to the conversation

Complete this record before asking others for feedback. “I do not know yet” is a useful answer when it identifies the next evidence you need. Keep private financials and deal documents out of an open event.

Milestone the business is trying to reach:
Evidence that milestone needs external capital:
Alternatives I still need to understand:
Assumptions about timing, cost and ownership:
Question for a general discussion:
Questions that need my own qualified adviser:

Choose an MLAI founder session that suits your question, topic and experience level, in person or online. Peer discussion is for learning, not selecting an investment or endorsing your financing terms.

Sources checked 10 September 2026. These worked examples are fictional and independent financial/legal review is pending. For an actual financing decision, obtain advice appropriate to your company and documents.

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About the Author

Dr Sam Donegan

Medical Doctor, AI Startup Founder & Lead Editor

Sam leads the MLAI editorial team, combining deep research in machine learning with practical guidance for Australian teams adopting AI responsibly.