The decrease in existing shareholders' ownership percentage of a company as a result of the issuance of new shares.
Why it matters: Every time a startup raises money, issues options, or issues warrants, the founders' slice of the pie gets smaller. Standard dilution per VC round is 15-25%.
In practice: You own 100% of 1,000 shares. The company issues 250 new shares to an investor. There are now 1,250 shares. You now own 80% (1,000/1,250), suffering 20% dilution.